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New Mexico State University

New Mexico State University

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Loan Consolidation May Not be the Answer to Solving Credit Problems

LAS CRUCES -- Loan consolidation may seem the best way to reduce financial problems and the quickest and easiest way to end the harassment from bill collectors. But people considering consolidation loans may not realize all of the financial implications of combining their debts, said a consumer education specialist with New Mexico State University.

A consolidation loan is a specific amount of money borrowed from a bank, credit union, savings and loan institution or finance company to pay several bills under one debt, said Susan Wright with NMSU's Cooperative Extension Service. Bills are paid with borrowed money.

"Although monthly payments for consolidation loans are smaller than payments for the previous bills, these loans usually are more costly than original bills because the repayment period is longer," she said. "In some instances, consolidated loans are calculated to include bills that originally had no interest. There also may be fees, such as a closing fee, which will increase the cost of the consolidation loan."

People who are considering a loan consolidation should get quotes from several different financial institutions for interest rates, special fees, monthly payments, total cost time for repayment and total interest to be paid, Wright advised. Compare costs and decide which loan will cost less over the period of the loan. Then calculate the total cost and how long it will take to pay off the original debts.

"You may find that, with some belt tightening and simple changes in your spending habits, you will be able to pay off the original debts for much less than a consolidation loan costs," Wright said.

Before taking out a consolidation loan, consider getting some financial counseling, she advised. The Consumer Credit Counseling Service offers free assistance to help consumers manage debt. A payment schedule with debtors can be arranged. Consumers have smaller payments and more time to get out of debt.

"Other alternatives to loan consolidation include using a very strict budget to lower expenses until debts are reduced," Wright said. "Increase income by selling items that are not used or needed. A family member might get a job or a second job. Some families may be eligible for assistance such as food stamps to make it through tough times."

The important thing is for people to reevaluate their lifestyles and consider where expenses can be eliminated or reduced, Wright said. Then set realistic financial goals that will help avoid debt in the future.