What is Wrong with Debt Consolidation?

Many people who find themselves in credit card debt turn to debt consolidation companies to help them deal with their bills. At first, debt consolidation seems like a good idea. The service usually reduces your interest rates and you only have to make one payment each month to take care of multiple bills. Unfortunately, there are many disadvantages to using the services of a debt consolidation company that you should be aware of before making your decision.

1. If you are approved for a debt consolidation loan, your interest rate is likely going to be higher than a personal loan to pay off your bills. The fact that you are consolidating your debts shows that you have made financial mistakes in the past and you are a higher loan risk for the lender. Therefore, they are going to protect their investment by charging a higher interest rate than normal.

2. If you are hiring a company to simply pay your debts while you make one payment to the company, the service fee could actually be going to pay down your debt further rather than paying the company a service fee.

3. Most debt consolidation loans are short term. This means you may be forced to pay off your consolidation loan much sooner and with higher payments than you would if you simply kept making payments on your credit cards. This means you will pay less money in the long run because the interest will not accrue as much, but you may need to make larger payments for the term of the loan.

4. Debt consolidation is more like a bandage for the problem. More than 60 percent of the people who use a debt consolidation service quit within six months and end up with more debt than they started with. Others continue to use their credit cards because they do not change their behaviors or spending habits because their debt consolidation loan is more of a “quick fix” to their financial problems.

5. Many debt consolidation loans require you to put up collateral for the money you receive. For many people, this is difficult because they do not have the assets they need to offer as collateral. If you run into more financial difficulties, you could have your assets seized or frozen and still be responsible for some of the debt.

6. In some cases, getting a debt consolidation loan is looked upon the same way a bankruptcy is looked upon when applying for a home mortgage. This may ruin your chances of getting a good mortgage rate or getting a mortgage at all.

Debt consolidation loans may seem like a good idea at first. But when you consider the drawbacks, you may want to reconsider your options.