What Are the Dangers of Debt Consolidation?
Debt consolidation can be a risky business. Although it may seem like an easy solution to your indebtedness, consolidating your debt might make your financial condition worse. It is always wise to count the costs before making a financial decision. Consider why debt consolidation might not be such a wise choice.
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Costs
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Consolidation loans may cost you fees and other expenses. Costs of debt consolidation depend on what kind of debt you are consolidating and how. A debt consolidation loan will cost you interest along with your payments, and often upfront fees as well. A debt counseling service will charge you monthly fees to handle and negotiate your debt. Compare the rates and terms: Often a smaller payment means larger debt with more interest and a longer loan term.
Risks
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Is a loan consolidation worth losing your home? People often take their unsecured debt (credit cards, student loans) and roll it into a home-equity debt consolidation loan. This is a big mistake. With this type of debt consolidation, you are taking a debt with little or no collateral and tying it to your biggest asset: your home. If you default on a credit card, the issuer has no real recourse, but you could lose your home if you default on a home-equity consolidation loan. If you must consolidate, never use your home as collateral.
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Your Credit Report
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Consolidation loans may ruin your credit. Chances are, if you are deep in debt and in need of a consolidation loan, your credit score isn't the best. A debt consolidation loan might lower your score, especially if some or all of your creditors haven't reported your newly paid-off balances. Make sure you check your credit report for accuracy.
Things You Should Know
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Start paying off your debt little by little. Dave Ramsey, host of a nationally syndicated radio show on personal finance, says 78% of debt consolidators end up back in credit card debt on top of their new consolidation loan. Consolidating your debt won't solve your debt problems. Paying the debt off is the only permanent solution.
Alternatives
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Negotiate with your creditors. Consolidation isn't always the best solution; in fact, it usually isn't. Negotiate with your creditors for lower interest and fee waivers. If you must consolidate, call a nationally recognized nonprofit credit counseling service, such as Consumer Credit Counseling Service. Cut up those credit cards, and take every extra dime to pay them down one by one.
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References
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