Three Debt Consolidation Traps
If you don't understand debt consolidation, it's easy to make costly mistakes. We'll alert you of the three biggest debt consolidation traps to avoid here.
Bad Signs
Before we launch into the three biggest debt consolidation traps, it's worthwhile to address some of the red flags of the industry. Unfortunately, no matter how well you understand debt consolidation, you can't trust every company you come across. Some services make impossible promises to lure you in, take your money, and leave you disappointed and broke. Companies that promise to slash your monthly payments, provide debt relief in a simple click, or obliterate your interest rates are not telling the truth and should be avoided. Debt consolidation can improve your situation, but it is not a magical solution to debt. Beware of services that make unrealistic promises.
#1: Loans with Excessively Long Terms
One way to understand debt consolidation is in the form of a personal loan. A bank or credit union gives you a loan with which you pay off your current debt. You then make payments on your consolidation loan with the goal of saving money on interest. However, most customers who need consolidation help don't have the credit requisite to qualify for good loans. As a result, they end up stuck with high-interest loans with obscenely long terms. A loan with a long term might ease your monthly payment burden, but your interest expenses overall will be higher than with your original debts.
#2: Choosing the Consolidation Company with the Biggest Promises
If you think a promise to make your debt go away instantly is realistic, then you don't understand debt consolidation. Effective debt consolidation takes time and hard work. No company can make your obligations vanish or make sky-high payments suddenly cheap. A consolidation company that promises you the world is most likely trying to con you into wasting a lot of money on their ineffective services. Also keep in mind that, after consolidating, only part of your payment will go toward your creditors; a portion, usually about 10%, goes toward your consolidation company as a commission of sorts.
#3: The Vicious Cycle of Balance Transfers
You might understand debt consolidation to mean balance transfers, or moving the balance of one card to another to capitalize on better interest rates. With the number of credit cards on the market, it's not difficult to find low-interest balance transfer deals. However, these deals don't last forever. Most low-interest balance transfers last between six months to a year. Once that time expires, you will have to switch credit cards yet again. If you do this enough, it will appear on your credit report and make you look like a poor credit risk. Lenders do not want to loan money to people who move their debt around instead of paying it off.
Do you have questions about debt consolidation that have not been answered? See if the same question has been answered in our frequently asked questions.
