Consumers look into debt consolidation options as a means to combine their payments into one bill and receive a lower interest rate on the debt, which helps them pay off balances quicker. While debt consolidation presents certain advantages, there also are some downsides to debt consolidation. It helps to understand the risks before consolidating your balances.
Higher Interest Rate
Applying for a debt consolidation loan doesn't automatically equal savings. Yes, a consolidated loan can provide a much cheaper interest rate than most credit cards, which can result in a lower monthly payment with fixed terms. However, not everyone qualifies for a low-rate debt consolidation loan. Getting a cheap interest rate on a debt consolidation, or any loan for that matter, requires a good credit history. Lenders check credit reports first, and they often give lower rates to individuals with credit scores in the 700 range and higher, and those who pay their bills on time each month. Those considering debt consolidation should get a loan quote first, and then compare the interest rate on the debt consolidation with what they are currently paying.
Risk of Foreclosure
Consumers often apply for home equity loans to consolidate their debts at a lower interest rate. This option is an effective method, but the risks associated with home equity loans are high. Taking out a loan and using your house as collateral puts a second lien on the home. Paying your home equity lender on time each month is just as crucial as paying the lender that supplied the first mortgage. Defaulting on a home equity loan can result in a home foreclosure.
Increasing Debt
The idea behind debt consolidation involves using cash from a loan to pay off your high-rate outstanding balances, and then repaying the debt consolidation lender at a lower interest rate. This method works as long as you don't re-accumulate debt. Paying off your credit cards with a debt consolidation loan isn't an excuse to accumulate new debt. Debt consolidation works only if you have self-control to curb spending with credit cards. Without control, you could end up doubling your debt and complicating your personal finances.
Debt Counselors
Some consumers decide to work with a debt or credit management company to consolidate their bills into one payment and get rid of their debt faster. Counselors talk with creditors to negotiate lower rates and payments on your account, and they then make bill payments on your behalf each month to your individual creditors. The problem with credit and debt management companies is that some charge hefty fees for their services, and they could send payments to your creditors late, thus lowering your credit score. Before you consolidate, you should talk with several credit and debt counselors and compare fees. If you choose to use a debt counselor to help consolidate your debt payments, keep a close eye on your credit accounts to ensure that the company forwards your payments by the due date.
0 comments:
Post a Comment