Blame it on the economy, falling home values and high credit card debt, but one thing is certain: U.S. residents are relying more than ever on debt consolidation loans. These loans, in which consumers work with private companies to turn several debts into one affordable loan payment each month, become more popular as consumers run up ever larger amounts of debt. With unemployment still near 10 percent across the country, U.S. residents have less spare cash. This means that they are relying more on credit cards to pay their bills, a tactic that leads to higher and higher amounts of debt. This is why the head of Prosper.com, which ranks as the world’s largest peer-to-peer lending marketplace, reported in February that debt consolidation loans now make up a higher-than-ever portion of the loans that the company is passing out.
Debt Consolidation on the Rise
Chris Larsen, chief executive officer and co-founder of Prosper, said that debt consolidation loans in January made up 59 percent of the loans that the company provided. This is a significant increase: Larsen said that these loans in normal times make up about 45 percent of the loans that Prosper.com provides. Larsen said, in a written statement, that he expects this to continue with the passage in late February of the Credit CARD Act, which puts new restrictions on the way credit card companies can operate. Larsen said that these companies will raise their interest rates to make up the revenue the Credit CARD Act regulation strips from them. Higher interest rates, then, will lead to even higher amounts of revolving debt for struggling consumers.
Do the Research
Before taking out a debt consolidation loan to deal with your debt, though, it’s important for you to do the research. First, make sure that any company with which you work provides, in writing, its exact fees and interest rates. You don’t want any surprises when that first monthly payment comes due. Make sure, too, that you know exactly how many months it will take you to pay off your accumulated debt. Be aware that taking out a debt consolidation loan will hurt your credit score. If your debt is high enough, though, that may be a risk worth taking.
The trends suggest that debt consolidation loans will become a tool for a greater number of consumers. It’s important, then, for consumers to do all the research necessary to make sure that the debt consolidation loans they take out are actually smart financial moves.