[John]

Sometimes I see in the Q&A section where a borrower is consolidating several lower interest loans into a single higher interest loan.  My first reaction is that this is not a very wise move and I have avoided those loans.  I am seeing this more and more.  Is there a valid reason why someone would do this? Am I missing something?

[thezinfan]

I am right there with you and I see these as a red flag...but, if i try to come up with reasons for this, here's what I can come up with:

1) one payment rather than many
2) you are "forced" to make progress on principal, where you aren't with the individual credit cards. Of course, you can still default on your LC loan.

[Blake]

I see it the same way and avoid.  A consolidation loan could just create more problems for the wrong borrower.

I also look at loans asking for much more than their revolving balance (or even limits!) skeptically.

[MTaylor]

Another reason is it sometimes results in a lower monthly payment for the borrower, although it will take them longer to pay off.

[Peter]

I have spoken to several borrowers about this. Many people like the forced discipline that making fixed monthly payments provides. They also want to just get rid of their credit card loans and there is tremendous satisfaction from paying them off in full.

If you look at it objectively it is not the best thing to do but managing money can be an emotional thing. I don't have any data on whether these borrowers perform well or badly but I don't bother avoiding them.

[yojoakak]

I'm also wary of people paying off their student loans. First because I thought Student Loans had low interest rates.

But more importantly (from my understanding) a Student Loan is a whole lot harder to get discharged in bankruptcy.

[priuspilot]

from: yojoakak on October 31, 2012, 03:36:45 PM

[TravelingPennies]

Great insight!  Thanks!

[flyp52]

Consolidating lower interest rate loans to a higher interest rate loan may indicate a cash flow problem.

[conorneu]

Consolidating might help a person's credit score, as they will have fewer active lines.

If a borrower was moving and needed to get a new mortgage, they may be able to save more on the mortgage with a now higher credit score than they have to pay on the additional interest on this smaller LC loan.

[rajuabju]

Agreed on this concern, and I too avoid whenever its stated. Of course, most of the time, its not stated in enough detail... but still. Just seems like a "common sense" filter

[Peter]

Sometimes the numbers / desc give me the "peter to pay paul"/cashflow prob vibe, sometimes not...

Anyway, wonder if possible to get more granular limit/rate, per credit line info - that'd be interesting.

[rawraw]

I *never* fund these notes.  My entire portfolio is of debt consolidation/credit card refinancing.  I would NEVER fund a note that is re-consolidating to a higher interest rate.  Of the five C's of credit, this speaks to their character -- and I'm not touching that with a fifty foot pole.

My ideal notes are consolidations where monthly payments are lower than current debt servicing requirements.  This + no delinquencies + my other filters has proved to be a very high quality screen.

[viking]

How would you even know if they are consolidating to a higher rate? Most borrowers do not state their current rates (and even if they did, I am not sure that I would trust it).

For those of you who would like to avoid these loans, do you then read each loan's Q/A and only fund those loans where they tell you that their current rates are lower?

p.s. The interest rates are not included in their credit report, so LC could not even include it in their profile for filtering....

[DanB]

Why do most people here "assume" that just because someone says they are consolidating or doing whatever the hell with the money...............that it necessarily means they're actually going to do what they say they're going to do?
Why do most people assume that just because someone actually pays down, say $25k worth of revolving debt, that it necessarily means that they won't just charge it back up in short order?