What is debt consolidation?
It is a type of loan which combines many different unsecured debts such as credit card debt, quick loans and medical expenses into one lump sum debt. Debt consolidation may reduce the loan interest rates every month and cut the overall cost of your loan. Debt consolidation might be too good to be true. It is the highest ranked customer complaint with the Federal Trade Commission.
Before taking up debt consolidation, you should analyse the terms and conditions with the help of an expert to prevent signing up to fraudulent scams. They will explain the terms and protect you from being exploited.
Here are a few points you should consider when taking up debt consolidation.
Consolidation leads to prolonged debt
For debt consolidation schemes that promise lower rates of payment for their clients, this often means that the client will be in debt for a longer period. Debt consolidation does not reduce your loan. It extends payments to ease the burden on the client now. You will still have to make the full payment. It may also accrue more interest because of the extended payment time.
Consolidation does not eliminate debt
Many clients are tempted by debt consolidation because of the promise of easier payments. Under consolidation, the debt is not eliminated. It is only rearranged, which means it will still need to be paid. Those in debt should seek to reform their debt management instead of opting for debt rearrangement, which consolidation seeks to achieve.
Consolidation is not the only step you will need to take
Debt consolidation often results in increased debt for some clients. Even though they are making less payments, their management skills of the money available is the same as it was when they took up the debt. Such clients may take up more debt because they believe they have the same financial habits as before. Instead of relying only on debt consolidation, clients need to create a payment schedule for their debt. They can also make a plan to save more, and work towards reducing their loan.
Interest rates are not fixed
Debt consolidation is popular because people assume that the interest rates will be lower. The interest is set by the lender, which means that there is no guarantee that clients can get debt consolidation at low rates. Lenders may increase their rates over time, especially for credit card balance transfers. Over time, debt consolidation repayments might turn out to be more expensive than maintaining the original debt repayment plan.
Debt consolidation should not be confused with elimination of debt. You will still have to make payments to clear your debt. These payments may be lower than what you are currently paying, but will tend to last for a longer period. With debt consolidation, you could end up paying more over a longer period of time. The lower interest rates, which appeal to most clients seeking consolidation, are not fixed. You should make sure to check through the terms with a financial or legal expert to know exactly what the debt consolidation means for you.