In today’s debt-driven society many of us are buried in quite a lot of consumer debt. Perhaps you’re making your monthly payments on time each month, but it just isn’t making a dent in your total debt balance overall. This can be very frustrating and lead you to search for solutions. One of the solutions that are frequently advertised on TV and the Internet is debt consolidation services. So, what are the services, and are they a legitimate solution and a good idea, or something to be avoided entirely?
Debt consolidation companies and the loans that they offer purport to help you pay down your debt faster and while paying less interest. Do they do this, or are they not worth the hassle? The reality is, these debt consolidation services and loans don’t help you tackle large debt balances. Statistically, you end up paying more interest and taking even longer to pay off your balance in the long run throughout the loan with debt consolidation.
- An extended payment plan means that you will be in debt for a longer timeframe.
- Debt consolidation is not debt elimination; it just moves the debt to another company.
- Debt consolidation is also not a debt settlement.
- Debt consolidation involves refinancing your debt with a longer payoff timeframe and different interest rates.
- Debt consolidation can scam you out of thousands of dollars, which is where all that advertising money comes from and why you see so many ads for it.
Debt consolidation combines several unsecured debts into one larger debt. These smaller debts can be composed of many different forms of debt, such as credit cards, medical bills, payday loans, and others. The consolidated loan creates the illusion of a lower monthly payment and interest rate but doesn’t save you money in the long run.
If you are wondering if you can find a great debt consolidation company to consolidate your debt, here is a critical statistic that you will want to know about: dishonest or fraudulent companies who offer services that fail to line up with what was advertised and rip off the consumer make up the single most received complaint by the Federal Trade Commission.
Your Debt Interest Rate May Not Be Lower
The amount of interest you pay on your debt consolidation loan will vary quite a bit and depends on the discretion of the lender, your credit score, your payment history, and your behavior. If you do manage to qualify for a lower interest rate, the company will often give you a variable interest rate and seek to raise the interest rate at the very first opportunity, should you miss even a single line of their fine print or be late on a single payment.
Interest Rates Can Change (Get Higher) at Any Time
This is especially true if you are consolidating credit cards by using a balance transfer feature or offer. These offers will typically include a promotional short-term interest rate that applies to balance transfers, but which will expire and then go back up to their typical interest rate, at which point you will be right back where you started. Also, the rate will likely continue to rise as time goes by.
In the vast majority of situations, your new debt consolidation loan will cause you to be in debt for an extended period. This is because your new payments will likely be lower, which means it will take longer to pay off the balance of the loan. This is just simple math.
Remember, Consolidating Your Debt Does Not Eliminate It
A debt consolidation loan restructures/refinances your debt and serves to “rearrange it,” rather than eliminate it. What you need to do is to eliminate your debt with a plan, rather than just moving it around.
Evaluate How You Handle Your Money
In most cases were people consolidate their loans, even after they get the consolidated loan paid off entirely, the debt comes right back. This is because they failed to address the main underlying problem, which was their spending habits.
Unless you are careful to establish healthy spending habits and follow a strict budget, your debt will most likely return after you pay it down. This will also cause you to take much longer than necessary to pay it down in the first place because people who don’t have a budget and stick to it are unlikely to make those larger payments that are so crucial to quick debt repayment.
How Debt Consolidation Compares to Debt Settlement
There is a big difference between debt consolidation and debt settlement. Debt consolidation rolls all your debts into one big loan with a new interest rate and timeframe. With debt settlement, you have a company negotiate a lump sum payment on your behalf that is significantly lower than the amount you owe.
Beware of debt settlement companies. Many of them charge over $1,500 to $3,500 as a fee and claim to renegotiate your payments after you pay them. However, many of these companies will take your money and then not negotiate your payments. Further, they will often tell you to stop making your payments and only pay them. They will then take this money in addition to the payments you give them. Then, they’ll take all the money you paid them and the payments you sent them. This will leave you on the hook for all those payments and all the late fees and damage to your credit score.
The solution to your debt problems is not likely to be found in some company’s debt consolidation or debt settlement services. Instead, the answer lies in creating a reasonable budget and sticking to it, developing good spending habits, and paying down your balances.