sealPurdue News

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,
Purdue News Service: (765) 494-2096; e-mail,

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