If you feel as if you are swimming against a current of debt, then chances are you have probably been looking for a way out of your debt situation. The Internet is awash with companies looking to help consumers get out of debt. Many of these companies offer debt consolidation as a way to effectively manage debt. Depending on your situation, debt consolidation may be beneficial.
What is Bad Credit Debt Consolidation?
As the name suggests, debt consolidation is the act of consolidating all high-interest, non-secured debt into one loan. Ways to accomplish this include getting a personal loan through a bank or credit union, getting a home equity loan or consolidating all credit cards into one card. The key is to make sure the resulting loan offers a lower interest rate than what you were previously paying. Besides banks, there are private lending clubs such as Prosper and LendingClub, which offer peer-to-peer loans for debt consolidation.
How Can Debt Consolidation Help?
Debt consolidation will ease the stress of having to worry about multiple card payments throughout the month. If you select a loan with a good interest rate, you will be paying less interest than you were before. This could mean that you will be out of debt sooner by consolidating your debt. In most cases, your monthly payment will be lower with a consolidation loan, which allows you to set aside money for an emergency fund.
Pitfalls of Debt Consolidation
Although debt consolidation seems like an ideal way to get out of debt, many times it doesn't work the way it is supposed to. The writers at Christian Personal Finance report that over 70 percent of those who consolidate their debt find themselves back in debt later. Many people do not address the bad spending habits that led to the large amounts of bad credit debt. Sometimes individuals seeking debt consolidation have impaired credit so the loans that they acquire to pay off their debts come with high interest rates. Over time they may end up paying more for their consolidated debt than they would have if they had just paid off their cards one at a time.
Debt Consolidation Scams to Avoid
Enter the words "debt consolidation" into an Internet search engine and dozens of companies offering their services will appear. Most of these companies are debt management and counseling firms. They are not offering consolidation in the true sense. Most of their services involve the customers making one monthly payment to the company and the company in turn paying the consumer's creditors. They can negotiate lower interest rates on behalf of the consumer as well. The problem is that not all of these companies are legitimate. Some of these companies take consumers' money then make late payments on their behalf or sometimes do not make the payments at all. This can worsen your credit even more.
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