2-Minute Money Manager: Should I Get a Debt Consolidation Loan?

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Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.

Today’s question is about finding help with debt; specifically, getting a debt consolidation loan.

Destroying debt is a subject I know a lot about. It was the subject of my first book and many of my TV news stories. Over the years, I’ve also served as a board member for a couple of nonprofit credit counseling agencies.

Watch the following video and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.

You also can learn how to send in a question of your own below.

For more information on this topic, check out “Ask Stacy: My Credit Card Debt Is Killing Me — What Can I Do?” and “9 Tips for Finding Good, Cheap Debt Help.” You can also go to the search at the top of this page, put in the word “debt” and find plenty of information on just about everything relating to this topic.

And if you need help with credit card, student loan or tax debt, you’ll find sources you can trust in our Solutions Center.

Got a question of your own to ask? Scroll down past the transcript.

Don’t want to watch? Here’s what I said in the video

Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by Money Talks News, serving up the best in personal finance news and advice since 1991.

Today’s question comes from Jackie:

I have two credit card companies suggesting a “personal Loan.” They offer a loan amount up to $35,000 in order to pay off credit cards and other accounts at 6.99% interest! This also shows I would have this loan paid off in 36 months. Advice?

Jackie, the first thing I’ve got to ask: Are you putting a Band-Aid on a gaping wound? In other words, why do you need a consolidation loan in the first place?

Let’s go through this, step by step.

Step No. 1: Determine why you’re in debt

If your debt is the result of something like a layoff, an illness or some other one-time event, that’s good. But if it’s coming from habitually spending more than you make — in other words, if you’re living beyond your means — that’s bad.

If you’re spending more than you make, you shouldn’t be thinking about a loan as your first step. Instead, you should first figure out where your spending leaks are and plug them. Otherwise, getting a debt consolidation loan is a short-term solution, since consistently spending more than you make will ultimately land you in bankruptcy court.

So, if you’re not sure where the problem lies, start tracking your expenses with a budgeting app like Mint or You Need a Budget and find out. Are you sending out more than you’re taking in?

Step No. 2: If you need help, find it

There are nonprofit credit counseling agencies out there that will offer advice and if the situation calls for it, set up a formal payment plan. Much of what they do is free. Not all are reputable, though, so be careful. One place to find free, honest, expert help is the debt page of our Solutions Center.

For more, check out “2-Minute Money Manager: Should I Use a Credit Counselor for Debt Help?”

If you really don’t need any help or guidance, then let’s move on to…

Step No. 3: Shopping consolidation loans

Let’s get back to Jackie’s specific question: She says she has two credit card companies offering loans up to $35,000 for up to three years at just under 7%. Should she bite?

Well, the first thing she should do is read the fine print on her current offers. What happens after three years? Can the interest rate change? Will the rate go up if she makes a late payment?

Once she’s secure in the details, it’s time to compare options.

For example, what about a zero-interest credit card? Zero percent is less than 6.99%, but there are often strings attached to these deals, like balance transfer fees. And it’s unlikely she’ll find a card with three years at that 0% rate.

She could also try a credit union. They often have lower rates than commercial banks, because they’re not-for-profit.

She could also check out peer-to-peer lending or direct, nonbank lenders. (You can find a few in our Solutions Center.) They commonly offer three-year loans at potentially low rates: the better your credit, the lower your rate.

Finally, Jackie could turn to a debt consolidation loan company by doing an online search for “debt consolidation.” But she needs to be careful. There are a lot of shady operators out there. She should scrutinize the fine print and read online reviews before committing.

Jackie, hope that helped. And I’ll see you all here next time!

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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

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