Debt Consolidation; The Good News and the Bad News

Debt consolidation, simply put, is taking out a loan to pay off more than one loan or debt. The new loan may be unsecured but usually it is a secured loan with collateral. This allows you to pay one monthly payment rather than several, as in the case of having several credit card debts or multiple loans. This can offer several advantages. The amount of the monthly payment is usually lower. The interest rate can also be lower, especially in the case of a loan that now has collateral. 

• Lower single monthly payment

• Lower interest rate

Who wouldn’t want to simplify their life by making one lower payment a month? Well, let us consider the fine print. The monthly payments are lower because the brand new shiny loan is going to be paid off in a longer period of time, and of course brand new and shiny means more money, significantly more. Lower interest, but in total, much more interest. When people are overwhelmed by debt, they are not always thinking about how a longer term loan can affect their future.
One of the common complaints about debt consolidation are the very high fees. Many companies take advantage of the desperation of their clients. Most fees will be at or near the state maximum. It is a very lucrative business which has led to many consolidation companies appearing overnight. This is where arming yourself with information and research can help to prevent being scammed. Shop around! There are reputable business out there. The key is to allow enough time to find the right consolidation company.

• Longer and larger loan

• High fees

Debt consolidation companies know that their clients are in a rather desperate position.  The concept of borrowing money because you owe money only leads to owing much more money! This band-aid approach could lead to much larger problems in the future.  Be realistic about why you are in debt.  If more money is being spent than being made, this option is not for you.

• Debt consolidation does not get you out of debt.  It creates more debt!
  

Another little known fact about debt consolidation is that if in the circumstance that bankruptcy must be filed, the consolidated debts may not be forgiven! No one wants to consider bankruptcy an option at the debt consolidation stage. However, the disadvantages should be factored in before making any decisions. The last thing anyone wants to do is to file bankruptcy and then still have to pay the debts! Debt consolidation can truly be a financial life saver for some, but unfortunately a long-term curse for others.

Tags: Bankruptcy, Debt Consolidation, debt reduction, debt scams, How to Get Out of Debt