Hoffman Brinker & Roberts reports that as many as 40 percent of American families spend more than they earn as of 2010. Although Americans are working to pay down the debts they have, they are still defaulting on loans and using credit cards. Under these circumstances, debt consolidation agreements sometimes seem like a good option. These agreements can reduce your debt but they aren't for everyone.
Ease of Acquisition
Debt consolidation works by taking out one large loan to pay off your other debts. The consolidation company acts as your new lender, whom you then repay under the terms of the agreement. However, because you have to take out a loan to consolidate, your consolidation eligibility depends on your credit score. People who need debt consolidation generally have missed payments and don't have ideal credit scores in the first place, so it isn't always easy to get the debt consolidation agreement you need.
Fees
Debt consolidation companies often include fees as part of debt consolidation agreements. This is not entirely unreasonable, since any lender usually wants at least a small profit. However, these fees quickly can add up. The What Is Debt Consolidation website asserts these fees may be as much as 20 percent of the total debt. You should always check the fine print of the agreement to avoid getting hit with unexpected fees that can negate your savings.
Reasons for Use
Typically, people turn to debt consolidation agreements because the consolidation company offers the opportunity to reduce monthly payments or lower current interest rates. However, some people also enter these agreements to simplify paying debts, since consolidation means you have only one payment to make.
Length of Agreement
Consolidation agreements can be virtually any length, as the amount you take out as a loan with the consolidation company depends on the amount of debt you want to consolidate. The more debt you put into the consolidation, the longer the agreement usually is. Paying only the minimum on the consolidation loan each month can add time to the agreement and end up costing you more.
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