This week’s theme on the Retirement Quick Tips Podcast is: Top 5 Money Traps To Avoid

Today, I’m talking about the debt consolidation loan money trap. If you have multiple debts to repay, the debt consolidation loan can be a helpful way to get multiple debts merged into one loan with a fixed interest and a single monthly payment, reducing the stress of managing multiple debts and multiple payments.

Sounds like a great idea, right? While there are some definite upsides of debt consolidation - the streamlining of your payments, & potentially securing a lower interest rate with the new loan, there are quite a few downsides too, making this a money trap.

1. Doesn’t address the underlying issue of potential spending problems and mismanagement of finances. Debt consolidation loan might not help much if you find yourself in the same situation next year because you didn’t address the root cause of your debts
2. Temporary decline in your credit score, because applying for the new loan is considered a hard credit inquiry
3. Sneaky added costs that make it difficult to understand the real cost of the loan: origination fees, balance transfer fees, closing costs and annual fees.
4. If the interest rate on the new loan isn’t less than what you’re currently paying, you’ll lock in a higher rate and pay more in interest for the convenience of consolidating your debt
5. According to Forbes: “you could still pay more in interest over the life of the new loan. When you consolidate debt, the repayment timeline starts from day one and may extend as long as seven years. Your overall monthly payment may be lower than you’re used to, but interest will accrue for a longer period of time.”

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast.

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance