Debt Consolidation - Pros and Cons
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Debt consolidation is the financial strategy of paying off and replacing several debts with one large
consolidation loan. This strategy is often deployed in an attempt to lock up a lower interest rate and/or a
fixed rate of interest on outstanding debt. However, the consolidation loan generally will require a much longer
repayment period.
The Benefits of Debt Consolidation
Advocates of this strategy emphasize that it will
eliminate or reduce substantially accrued interest charges and penalty fees that have accumulated as well as
consolidating all debts into a single monthly payment. Many times credit counselors can successfully
negotiate a lower interest rate so that their counseling fees will be paid with interest cost savings. Other
benefits can include avoiding bankruptcy, stopping distressing collection calls and eliminating heavy late
fees.
The Down Side
Nonetheless, debt consolidation can also be very risky and most often is not an easy, simple solution to every debt
problem. After all of the outstanding debts are paid by the new loan the debtor remains in debt…the debt has
not magically gone away, it has just been refinanced. The principle amount owed does not decrease. When
advertisements promise “debt free”, it means after several years of payments.
So the promises of debt consolidation can be too alluring and sadly many people believe that it buys
some incredible financial magic and will make their debt shrink from tens of thousands of dollars to just a
few hundred dollars over night. Who hasn't seen these exaggerated claims?
Is a Lower Interest Rate Really Available?
Someone that needs to consolidate debt most
likely has already missed or been late on at least one payment resulting in their credit history and credit score
showing less than stellar reports. Anyone willing to approve a large loan to a credit risk in order to
pay off other loans will be doing so at a much higher interest rate than what the debtor is most likely already
paying.
Is This Service Really Worth The Cost?
Is it worth paying for a service to do what most anyone can do on their own accord, without much help? Some
debt consolidator services promise to take care of everything for their clients. While it might seem a bit
difficult to interpret credit reports and make sense of credit scores then to make the required phone
calls and negotiate better interest rates, it is much better than bearing a charge of 10% of the total debt
for a debt service to do it.
From The Pan into the Fire?
Debtors need to be assured that the company hired is reputable,
has ample testimonials as to their work and offer some sort of acceptable guarantee. A client should never
leave a debt consolidation company with a credit score lower than the one they had when they signed-up
with them.
Having a good handle on the total debt owed and how much time realistically it should take to pay it off is
important so when a representative from a debt consolidation company argues that it will take 35 years to
pay outstanding debt off and you know it will only take 10 years you have a good test with which to
judge their honesty.
Do This No Matter What
One of the best ways you help yourself even if you don’t formally consolidate your debt is to cut up and throw away
your credit cards. If they are the cause of the problem and got you into trouble to begin with
continuing to use them will only get you in deeper.
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