Living with credit, Protecting yourself

What you can learn from my flurry of debt consolidation offers

John Egan

A virtual forest full of trees must have been chopped down to produce the paper for all the offers I’ve recently received in the mail to consolidate my credit card debts.

While it would be enticing to jump on at least one of the deals – all of which promise to rescue me from high-interest credit card debt – I’m not about to leap at any of these offers without doing my due diligence.

Why the hesitation? Because not all of these offers are in my best interest, even though these offers are presumably designed to reduce the interest I would pay on higher-interest debts.

As explained by the National Endowment for Financial Education (NEFE), a debt consolidation loan lumps several debts into one loan at one interest rate. The payment period for a debt consolidation loan is stretched out, leading to a lower monthly payment.

The downside of debt consolidation

However, NEFE points out, lengthening the amount of time to pay off the debt bumps up the financial burden.

For example:

A five-year loan for $20,000 at a 10 percent interest rate would have a consumer paying about $425 monthly and owing total interest of $5,496. Extending the loan length to 15 years would drop the monthly payment to $215, but it would boost the total interest to $18,685.

You don’t have to be a math genius to realize that’s not a good outcome.

“The advertising for debt consolidation loans often fails to mention the downsides of these types of loans,” Ted Beck, president and CEO of the financial education group, says in a news release.

“In presenting debt consolidation as an option, much of the focus is placed on the ‘lower’ amount of monthly payments, without regard to impacts like total interest paid. We encourage consumers to enter any financial decision with their eyes wide open.”

Weighing the offers

I, too, encourage you to consider a debt consolidation loan with your eyes wide open. A review of four debt consolidation offers I’ve gotten recently illustrates why.

Offer A

I’ve been preapproved for a debt consolidation loan of $5,000 to $35,000. In just three “simple steps,” I’ll be on my way to saying goodbye to credit card debt, the offer indicates.

Sounds great, right? If you read the fine print, it could be an offer worth accepting, except that the range of fixed annual percentage rates (APRs) is 6 percent to 25 percent. Any debt I’d be consolidating would have an APR well above 6 percent but well below 25 percent.

That alone means I’ll likely toss this offer in the paper shredder. Making matters worse, the loan comes with an origination fee of up to 5 percent. The one-time fee is deducted from the amount of the loan.

Offer B

I’ve been preapproved for a debt consolidation loan of up to $50,000! Wow, I’m impressed!

But wait. … The range of fixed APRs for this loan is 5.96 percent to 35.97 percent. Whoa!

On top of that, each loan has an origination fee of 1 percent to 6 percent of the loan amount; the fee is subtracted from the loan proceeds.

Once again, this offer isn’t worth pursuing. Too many strings are attached.

Offer C

This offer is good for a loan of $3,000 to $12,000. I can call or visit a local office to find out whether I qualify, or I can apply online. I’m not preapproved for this deal.

“Make today the day to say goodbye to those troublesome plastic monsters that can throw you off course,” the offer says.

One big drawback: The one-page offer fails to tell me what the possible APR is. Is it 10 percent? Is it 30 percent? I have no clue.

Given the lack of details, this offer also will end up in the junk pile.

Offer D

This offer is extended by one of my credit card issuers. It’s a balance transfer card with a 0 percent APR for 12 months and a 3 percent balance transfer fee. After the promotional period ends, the APR switches to a variable 24.15 percent. Yikes!

Actually, I’ve previously taken advantage of the same type of offer from the same credit card issuer. Why? Because I did the math and realized I could save money in the long run if I paid off the transferred debt within the 12-month promotional period.

This is an offer I might have considered again to consolidate debts from two credit cards with variable APRs of 17.24 percent and 19.49 percent, respectively. However, the balances on those two cards are so low at this point that the balance-transfer option wouldn’t make financial sense.

A different (and better) approach

Aside from a balance-transfer deal, I’ve also used loans from two peer-to-peer lending platforms to consolidate higher-interest credit card debts.

In 2016, I took out a three-year, $14,700 loan from one lending platform at an APR of 8.49 percent – far below the APRs on the credit card debts I consolidated. During that period, the interest will add up to $2,004.

The same year, I was approved for a three-year, $15,840 loan from another lending platform at an APR of 5.99 percent. Once again, that’s far below the APRs on the credit card debts I paid off. Over time, the total interest cost will be $1,506.

With those two loans, it’s clear that I’m slashing the interest I would have paid on those debts. And it’s clear that the debt consolidation solicitations that have been clogging my mailbox aren’t, in my case, worth the paper they’re written on.

Tread carefully

The final verdict here: Borrower beware.

While a debt consolidation offer might appear attractive at first glance, it takes some sifting through the fine print – and a bit of number crunching – to determine whether such a proposition is a deal or a dud.

See related: What is a balance transfer? 9 things to know, Debt consolidation: 4 options to streamline multiple debts

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