Debt consolidation, without question, is a viable means of gaining control over seemingly unmanageable debt. However, it’s important to understand consolidation is a treatment, rather than a cure. You must follow a prescribed methodology for it to be effective. With that thought in mind, here are some things you need to know about debt consolidation.
You’re Still Indebted
Debt consolidation takes as many of your outstanding obligations as possible and bundles them into one neat package. The advantage of this is that you'll only have a single payment to make each month, one usually lower than if you continue paying each of those bills separately.
Further, rather than dealing with a wide range of interest rates, you’ll only have the one with which to contend — and it too is often lower than the ones you have now.
However, as wonderful as all of that really is — you’re still indebted.
Scoundrels Are Plentiful and Crafty
Every friendly face is not that of a friend. Whenever money is involved, there’s always going to be somebody sniffing around for a way to get as much as possible for the least amount of work practicable. In other words, you have to watch your back, because people will steal from you.
Exercise due diligence to be certain you’re signing the best contract possible for your circumstances before agreeing to any debt consolidation program. Investigate the lender to be certain it has a strong reputation. Make every effort to know the pitfalls of the deal and do everything you can to avoid them.
You Could Lose Your Home
If you use the proceeds of a home equity loan to pay off your debts, you’ll trade your unsecured credit card obligations for a liability secured by an interest in your property.
The lender could force you to sell to reclaim their capital if something goes wrong and you’re unable to satisfy the consolidation loan. Meanwhile, you could have filed for bankruptcy protection with credit card debt and walked away from it. You can’t do that with a secured loan.
You Might Be Better Off Without It
In our haste to find quick solutions, it can be easy to overlook the fact we might be better off going the long route on our own. The debt snowball and avalanche methods can work largely the same as a consolidation, without taking on the inherent risks.
Further, as these Freedom Debt Relief reviews attest, engaging the services of such a company to negotiate better repayment terms could be a viable option as well. In other words, investigate all of your options carefully before jumping on consolidation because it seems like a fast path to debt-free living.
You Have to Avoid Creating New Debt
OK, so you just got your debt consolidation loan and paid off all of your credit cards. Most financial experts will advise you to keep those accounts open to help boost your credit score. However, now you’re sitting there — holding a deck of credit cards with zero balances.
The temptation to go out and buy the first thing that makes you feel good is going to be a powerful impulse. You’ll tell yourself it’s OK to do so because your bills are much lower now that you only have the consolidation loan with which to deal. You’ll tell yourself you deserve a treat because you’ve been under so much stress.
You’ll tell yourself you’ll keep spending under control.
Maybe you will — but frankly, you probably won’t.
Old habits resurface for far too many people. Before you know it, those cards will all have balances again and you’ll still be paying off the consolidation loan. In other words, you’ll be in worse shape than you were before.
Cut up the cards so you don’t have them at hand. Remove them from your online shopping sites and cancel all of your auto-renewing subscriptions. Of all the things you need to know about debt consolidation, the most important is you must stop charging until after you’ve paid off the loan.