It happens to almost everyone. They find themselves maxed out on credit with nowhere to turn. There are many option these days, but consumers should beware of debt consolidation loans.
Once in a while it may be acceptable to pursue your needs for special loans to help get out of debt, but overall it is best to work with other programs that will both change your credit habits and reduce your total amount of money owed.
A debt consolidation loan is structured in such a way that it takes your existing debt, which can be owed to various lenders, credit card companies, retail stores, school loans, car companies and mortgage holders and pays off all of those debts with one new bigger loan, which totals the amount of all the other loans.
For example, if you owed $10,000 on 3 credit cards, $5000 on a car, and $20,000 on school loans, you could get a single debt consolidation loan to pay off all these other amounts, and owe $35,000 to one company. While this may initially be appealing, there are many hidden dangers and traps for the consumer, and benefits for the credit card and lending companies.
The biggest risk is the lack of change in spending and credit habits. Without a change in how money is spent and credit is used, all of the accounts which now have a zero balance after consolidation, could quickly inflate, leaving the borrower with a compunded loan and additional new credit card debt. Instead of owing $30,000 to the bank, in addition you could end up owing them another $5000 or $10,000 on credit cards.
Another concern is the interest rate and fees paid for these debt consolidation loans versus credit card and other loans. Student loans are typically at a low interest rate, and the rates offered for a debt consolidation loan may be higher, resulting in more money paid out to the lending company and less savings for the consumer.
There could be additional charges and processing fees, adjustable and fluctuating terms that rise over time, and other undisclosed fees. A loan with a low rate that is consolidated into a loan with a higher rate, means more money being paid to the bank, and less money in your pocket.
The goal for any borrower is to get the lowest interest rate possible, with the best terms and fees, to decrease their overall amount of debt. Historically, many people who consolidate debt without a change in spending habits and credit use increase their overall debt to an amount greater than what they had before consolidation.
One of the best solutions is a debt management plan. These plans allow professionals to negotiate directly with your lenders, getting a reduction in the amount owed, as well as a freezing interest and penalties. They also offer the best possible payment terms. You simply make a single monthly affordable payment into your debt management plan, which then distributes the payments to all of your creditors and lenders. You will only have only one payment to make, and over time you can reduce and eventually eliminate your debt, while no longer being financially stretched.
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