Debt consolidation is one of many options available to people who are having trouble managing their debt. This method can be a viable option, however, consumers must be aware of possible dangers involved.
Debt Consolidation
This method does not reduce the amount of money you owe. Rather, it will take all of your existing debt and reduce it to one single payment. This tends to lower the monthly payment and can reduce interest charges.
Is it a Rip-Off?
In its most basic form, debt consolidation can help a consumer whose payments have gotten too large. There are many banks that offer such consolidation loans and they are perfectly legitimate.
Rip-Off Problem One
Using a consolidation company, however, is a bad idea.These companies don't really offer you loan, they negotiate a lower payment to the credit card companies. The consolidation company will take your money and send it (minus their cut) to the credit card companies--if they remember to make the payment. According to MSN Money's research, these companies sometimes forget to pay your bills, and this is then negatively reflected on your credit report.
Rip-Off Problem Two
Additionally, these companies will charge you 10% to 35% of the monthly payment as their "cut," This is a very steep cost for negotiating a better rate and lower payments with your creditors--something you can do yourself.
The good vs the bad
A debt consolidation loan can be a solid solution if you are using a reputable lender. Do not be taken in by debt consolidation companies who often use scare tactics to make you believe you can't solve your debt problems without them.
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