When debt begins to overwhelm your finances, it not only interferes with your ability to make ends meet, but it also might make it difficult for you to get a future loan or line of credit. Debt consolidation companies buy out your existing debt and pay off your creditors, allowing one a lower monthly payment, rather than several different payments you can't afford to make. It sounds like a dream come true, especially if you are drowning in debt, but there are important factors to consider before you sign on with a debt consolidation company.
Pro: Reduced Monthly Payment
When you have an overwhelming amount of debt, falling behind on your payments can put your accounts in danger of default and collection. A debt consolidation company lowers your overall monthly payment amount and decreases the danger of defaulting on your accounts. Once your debts are consolidated, you only make one payment, rather than several. You receive fewer calls and letters from the original creditor because they are getting paid.
Con: Fees
When you contract a debt consolidation company to manage your debt on your behalf, you are often required to pay the company a high fee. Many debt consolidation companies lend their clients the money they need to settle their debts, offering a high interest loan that takes far longer to repay than the sum of the client's original debt.
Pro: One Payment
Keeping track of monthly payments can be an overwhelming process, especially if you have a lot of debt. When you consolidate your debt with a debt consolidation company, you not only decrease the amount you pay out each month, but you are also responsible for making one simple payment, rather than several. In the long run, this saves you money on stamps and checks, which can add up over the year if you have a significant number of payments, and makes it easier for you to guarantee your payment is made on time each month.
Con: Foregoing Settlement on Smaller Debts
For many debtors, it is more beneficial to save their money and pay off smaller debts with higher interest rates one by one. When those smaller debts are consolidated into one lump-sum payment with the rest of your debt, you will be unable to take advantage of settlement offers from the creditor to eliminate the debt for less than the original amount due. Many creditors make settlement offers on past-due debts because they would rather get some of the money than none of the money. Defaulted and unpaid debts damage your credit and appear on your credit report for seven to 10 years, making it difficult for you to get credit and loans in the future. Your credit score will suffer as well, because your original loan or line of credit is not paid back as per the terms of your original agreement with the creditor.
Con: Dishonest Credit Consolidation Companies
Many credit companies earn money by taking a cut of the monthly savings earned through lower payments and debt settlement offers. The dishonest credit consolidation companies often charge you a large fee up front, and then continue taking a cut from your monthly savings. Another sign of a dishonest consolidation company is the lack of a plan designed to help get you out of a debt. If the company you are working with doesn't have a plan in place, it probably will fail to talk to you about the dangers of using credit during the consolidation as well. Many honest consolidation companies will provide you with a plan and an offer of debt counseling services to help you not only get on the right track, but learn how to manage your money so you don't end up back in debt again.
0 comments:
Post a Comment