Watch Out for the Debt Consolidation Traps
Don’t Believe in Grandiose Promises
In case you’re drowning in debt and opting for debt consolidation, you might wish to pump your brakes unless you get the entire picture. Debt consolidation combines your scattered debt into a single outgoing payment and the payment is often lower than paying several accounts separately. The interest rates are lowered and the borrower is allowed to focus on one debt instead of splitting his monthly income among multiple creditors. Can something so good turn out to be a nightmare for the borrowers with good intentions of getting out of debt? Well, there are instances where borrowers have taken out credit card debt consolidation loans to reap the benefit of paying a single company and that backfired in the long run. However, all of them have learned from their mistakes.
So, if you’re someone who has racked up thousands of dollars on your credit cards and you’re looking for consolidation through an unsecured loan, you should ensure that this doesn’t just mask the underlying issue instead of fixing it. Instead of making things worse through a debt consolidation loan, read on the concerns of this article to know the tricks and traps that are usually associated with this bankruptcy alternative.
Utilizing Debt Consolidation as the Ultimate Panacea to Your Debt Problems
If you’re a consumer whose ultimate goal is to climb out of debt, debt consolidation loans won’t be a good choice for you. According to estimates 75% of debtors who consolidate debt are the ones who end up with even more debt few years later. For instance, there might be people who might be combining debt only to max out on their credit cards by using the newly found credit line. While taking out a debt consolidation loan, you need to change your attitude towards money. Consolidation loans aren’t bad, but if you continue with your bad financial moves, you will just end up delaying the inevitable. So, let go of your bad habits like maxing out your plastics, using them for every little purchase and missing payments.
“Oh, no you didn’t!”. Ashleigh Kenny Tucker and Floyd Rose by faul, on Flickr. This work is licensed under a Creative Commons Attribution 3.0 Unported License.
Blindly Relying on Expensive Debt Consolidation Services
To be very frank, debt consolidation services don’t do anything that you can’t do on your own. They will charge you hefty fees for their services, either in the form of high rates or monthly fees. Although sometimes this might be a good option to alleviate your stress, but not then when it costs you more money in the long run. Instead of this, it is certainly better to look for do-it-yourself debt consolidation options like balance transfer, taking out an unsecured loan or even a home equity loan.
Risking Your House by Tapping the Equity Accumulated in It
This is when your debt consolidation attempt might invite serious problems. Consolidating your debt through a home equity loan or a home equity line of credit might seem to be reasonable at times but this option puts your home at risk. If you use an HEL or an HELOC to combine your debts, you’re actually guaranteeing the home loan with a pink slip to your home. With the incredibly low home loan interest rates in the present market conditions, this might seem to be a lucrative idea, but transforming from unsecured debt to secured debt by your vital asset, your home, would be rather risky. Ensure you’re able to make this extra payment, when you’re taking this decision to combine through a home equity loan.
Apart from the above mentioned problems, there’s another hidden problem with debt consolidation. While you might lower the payments in a single month, this might cost you in the long run. You being in debt for a longer period of time will make you accumulate more interest rates throughout the extended period of time. You may just feel that you’re paying less but actually you might be paying more than what you owe. Thus, if you have to opt for debt consolidation, make sure you actually benefit from the deal.
