If you have a lot of creditors you owe money to, you know what a hassle it is to pay numerous bills every month. You are probably also looking for a way to lower your monthly payments.
A lot of people facing this dilemma look to debt consolidation loans as their savior – but before you apply for one there are some things you should know.
First of all, you are likely to owe MORE than when you started due to the fees that are stacked on to the loan by the debt consolidation company. Additionally, you are just moving the debt and not paying it off.
So you may lower your monthly payments, but in the end you are likely to owe more and possibly a whole lot more.
Also, if you have less than perfect credit or you are late with any of your payments you more than likely going to face higher interest charges. Those that need a debt consolidation loan the most are typically the ones that get charged high interest rates.
Debt consolidation loans can also ding your credit. Applying for new credit will lower your credit score. Also, by rolling over your debts you are closing the old accounts, which will also affect your score.
If the loan dictates that you negotiate a lower balance or "deficiency balance" with your creditors, you will harm your credit because you are asking the creditors to accept less than what you owe. This will be treated as a late payment on your credit score.
Debt consolidation loans do not address the problem. Nearly 90% of the time people take out these types of loans, they do not change the behavior that got them into debt and they turn right around and go back into debt.
You should stay away from debt consolidation loans period. The only way it might make sense is if you were facing bankruptcy. Outside of that, steer clear. The negative ramifications truly outweigh the benefits. The best way out of debt is through intestine sacrificing budgeting, developing a game plan, and sticking to it.