For someone struggling with many loans to pay off, consolidating the various smaller loans into one large loan, seems, on the surface, to be a great idea. After all, not only will the debt now be much more manageable and simple, as one can now concentrate on one, larger loan, versus being burdened by many smaller loans, loan consolidation will usually greatly reduce the interest rate, meaning that those monthly interest payments will greatly decrease, by only having to pay interest to the loan consolidation company, which is usually much lower than all the smaller interest charges combined.
However,one must ask oneself if he or she is not going from the frying pan into the fire. The loan consolidation companies obviously are making money somehow. And that is because, although the monthly interest payments will be reduced, the loan will be greatly extended over a much longer period of time, in such a way that in the long run, the borrower will end up paying more interest than he or she would have without consolidating the loan.
There are many other pitfalls that may arise when consolidating a loan. If the loan consolidation company requires a borrower to secure the loan through a home equity, the borrower will now be going from an unsecured debt, to a secured one, meaning that if he or she doesn’t manage to pay up, he may lose his house.
In any case, taking out a loan consolidation does not do anything to solve to core problem: That the borrower is in debt, either because he is spending more than he should, or because he or she is not earning sufficiently.Taking out a loan consolidation will do nothing to help in the long run if the borrower does not take immediate steps to insure that both the debt will be paid off in a timely manner, and that it will not happen again either, by honestly calculating all of one’s earnings, expenses, and appropriate spending. Having less interest to pay monthly will certainly do nothing to help if the borrower will continue to spend too much and continue to go down in debt.
So, are loan consolidation companies worthwhile? Well, it depends. If you find an honest and trusted loan consolidation company which is not looking to rip you off because they know that you are in a sensitive and desperate situation, then loan consolidation companies may be worth it.
However, this will only work if the one in debt starts to take immediate steps to insure he or she is on an appropriate spending plan.That way, the borrower will gain in the short run, by having greatly reduced monthly payments and by having less worries on his or her back, but he or she will also gain in the long run, by taking definite actions to ensure his or her debt-free future.
But if the one in debt continues to recklessly spend more than he or she is able to, not only will the problem not be solved, as the total debt will not go away, but in the long run, more interest will be paid out of his or her pocket.