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May 1998
Loan consolidation: Fiscal savior
or final step to financial ruin?
WEST LAFAYETTE, Ind. -- Loan consolidation -- paying off several smaller debts with
one larger loan -- has just delayed financial disaster for many consumers rather than
helped them avoid it, according to a Purdue University expert on family finances.
"Loan consolidation often leads to the next step, and that's bankruptcy," says Purdue
Cooperative Extension Service specialist Janet Bechman. "Consumers who consolidate
loans without changing their spending habits are likely to dig themselves deeper
in debt, not out of it."
Bechman, who is an accredited financial counselor, says that in some instances, consumers
could actually pay off their debt sooner without loan consolidation. "Loan consolidation
is a means of paying off existing debts over a longer period and at a greater overall expense. If people concentrated on paying off their bills one by one, they
might pay more per month in the short run, but actually come out ahead faster than
if they had taken out another loan," Bechman says.
She suggests that consumers chart out their monthly bill paying and compare it to
the cost of a consolidation loan. "Normally, as you pay down your debt, your total
monthly payments decrease. However, with a loan consolidation, the payment will remain
fixed for the entire length of the loan," she says.
Bechman says another drawback is the initial sense of freedom some consumers feel
after consolidating loans. "They see that their bills amount to $80 a month now rather
than the $100 before. In their mind they reason that they used to be able to pay
out more per month, so rather than stop spending, they spend more," Bechman says.
Not all loan consolidations are bad, but Bechman says they should be used by consumers
who understand themselves and are able to apply self-discipline. "If you comparison
shop for your loan and select a reputable lender, then you might find it helpful
in the event of an unexpected loss of income -- such as an accident or job loss," she says.
While the name may be different, generally half of all second mortgages are used to
consolidate debts, according to Bechman. "The unfortunate thing is that people can
lose their houses when they default on a second mortgage or home equity loan," she
points out.
CONTACT: Bechman, (765) 494-8309
Compiled by Kate Walker, (765) 494-2073; e-mail,
kate_walker@purdue.edu
Purdue News Service: (765) 494-2096; e-mail, purduenews@purdue.edu
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