Debt Consolidation Warnings

Consumers will sometimes look to debt consolidation as a way to reduce their monthly obligations and get debt under control. But before you get involved in debt consolidation, there are some warnings you should heed. The more you understand the process and consequences of debt consolidation, the better prepared you will be to negotiate a favorable deal for your situation.

Balance Transfers

One of the ways in which consumers will use to consolidate debt is to transfer it to a new account that promises a zero interest rate on account transfers, according to Jenny McCune, on the Bankrate website. The danger in using a balance transfer is the zero percent interest rate is often an introductory rate that will go up after that period is over. Read the fine print on any credit account that you intend to use to transfer a balance and be sure to understand when the rate goes up and what the maximum possible interest rate will be.

Costs

The process of debt consolidation brings several high-interest rate credit accounts together into one single payment. While this can seem advantageous, if you do not watch the numbers the consolidation loan can cost more than the separate accounts, according to the Federal Trade Commission. Pay attention to the interest rate you are getting on your consolidation loan and make sure it is less than the lowest rate on the credit accounts you are consolidating. In some cases, the loan company will roll insurance and fees into the loan that drive up the costs. Compare the final cost of your consolidation loan to the cost of having your separate accounts before making the final decision.

Loans

Home equity loans and borrowing against a retirement program are two popular ways that consumers use to consolidate debt, according to Liz Weston, from MSN Money. With a home equity loan you are securing the loan with your home. If you default on the loan, you could lose your home. When you borrow against a 401k program at work you can get the money you need at a reasonable interest rate and have adequate time to pay it off. If you leave the company or are terminated, then the company can ask you to pay that 401k loan back at an accelerated rate. Be careful when using secured loans or retirement account loans to consolidate debt.

Focused Solution

Consumers that get involved in debt consolidation can make the mistake of believing that consolidation eliminates debt. The process of debt consolidation is one way of getting your debt under control, and it should be a part of a comprehensive debt control program; however, if you need assistance creating a budget and limiting your credit spending, then you should see a credit counselor. Debt consolidation is not a final answer to debt management problems. It is one part of a solution that should address your spending habits and help you make good financial decisions in the future.