Debt consolidation can be an effective way to lower monthly debt payments, reduce interest rates and give consumers greater convenience with a single monthly repayment. But these benefits can only be reaped if the path of debt consolidation is carefully thought out and considered before being followed. For a large number of consumers who fall foul of the pitfalls of debt consolidation, they are dismayed to find that they pay more fees, find themselves in a larger amount of debt and rack up more interest.
A debt consolidation loan will not solve all of your financial troubles, but it can help ease your repayment burden and enable you to focus on getting out of debt more quickly. Follow out guide to the top 4 traps of debt consolidation in order to avoid getting stung.
Debt consolidation probably is not a good idea for you if:
1) You have unrealistic expectations of debt consolidation
Debt consolidation loans will not immediately deliver you from the hands of debt. Consumers that look towards debt consolidation loans as a way to magically vanish their debts away will be disappointed with the more realistic figures which show at least 70% of those receiving consolidation loans have the same amount of debt or more in the following few years. This is because the majority may take a debt consolidation loan to cover their credit card debt, but continue to rack up new debts with their cards. The underlying issues are your spending behaviors– debt consolidation will not tackle that for you. Being financially disciplined and self-aware, however, will help you avoid this pitfall.
2) You resort to using a costly debt consolidation service
A debt consolidation company cannot do anything for you that you cannot do yourself, for free. Unfortunately, thousands of consumers employ the services of such companies at considerable expense, often negating any savings or cost benefits of the consolidation itself. The upfront fees of monthly service fees which are accrued when you make payments through them can run into thousands of dollars over the course of your loan repayment. As a general rule, any service that costs you money and claims to save you money, should be viewed with extreme caution. It is more advisable to look into debt consolidation alone – consider changing your credit cards to a low or no interest card or even opt for a home equity loan.
3) You pay more interest eventually
One of the biggest pitfalls of debt consolidation loans is more interest payments. Granted, lower payments are a bonus, but they come at a cost. Lower monthly payments are often offset by the longer repayment periods. So, while you may pay less each month, your total interest payments over the course of the loan may be higher, even if your consolidation loan comes at a lower interest rate that your primary debt (i.e. from the credit card, personal loan you are consolidating). If you have a lot of credit card debt, it might be better to focus on paying them down individually to save on interest in the long run.
If you still think that debt consolidation is the right move for you, read some of our guides to navigate your way through the process. We can also help you find lenders offering competitive debt consolidation loans.