A consolidated loan allows an individual to take out one big loan to pay off credit card debt owed to different credit card companies. Consequently, instead of making debt payments to several creditors, an individual makes one payment to one creditor, the institution that provided the consolidated loan. While consolidated loan advertisers state this get-out-of-debt remedy offers lower interest rates and fewer creditors to pay, debt consolidation does not always save debtors money.
High Interest Rates
Consolidated loans offer low interest rates to those who qualify. This generally means the lower interest rate is available to customers who have better credit scores. Consolidated loan lenders may charge high interest rates to those who have poor credit scores or those who do not want to secure the loan with an asset, such as a home. The Clear Debt Now website states that it is possible for some collection agencies and credit card companies to lower an interest rate when an individual attempts to consolidate her loans.
No Real Savings
Debt consolidation agencies sometimes advertise that customers make lower monthly payments with their services than they would without the assistance. According to financial advisor Dave Ramsey, the lower payments are offered because of extended loan terms. The term of a loan is the amount of time it takes to pay the loan in full. The loan consolidation company can offer lower monthly payments because a customer will stay in debt longer. Consequently, the longer an individual stays in debt, the more money he will pay the consolidated loan company overall. Clear Debt Now states that this debt relief service could have a negative impact on a customer's credit score. Additionally, the money an individual saves through the consolidation company may be considered taxable income.
Administrative Fees
It is common for a consolidated loan company to charge a monthly administrative fee. The Federal Trade Commission reports that less-reputable consolidated loan programs may not disclose all their fees or their fee schedule. While a loan consolidation company may offer lower monthly loan payments, the monthly administrative fee could be high enough that the result does not yield any real savings for a customer. Clear Debt Now reports that this type of debt relief service could result in an overall debt increase because of the accumulation of extra fees.
Only Treating the Symptoms
A consolidated loan program may not help a debtor because these programs only mask the symptom of a larger spending problem, according to Ramsey. Instead of taking care of the spending problems that caused the debt, an individual just moves the debt to a new creditor. Ramsey states it is not unusual for customers who use a debt consolidation program to re-accumulate debt onto their credit cards because they did not learn how to spend within their means or have a plan to pay-off the original debt. Consolidated loans may not be the solution for debt if an individual does not employ responsible spending habits.
0 comments:
Post a Comment