Debt Consolidation Loans
Owing money to multiple creditors can be stressful, not to mention time consuming, when you are faced with making several individual payments every month. Applying for a debt consolidation loan will not only create smaller monthly payments, but will also allow you to make one simple installment.
However, before you get too excited about this, there are some things you need to know about debt consolidation companies before you apply.
The first thing you need to know is that there is going to be a fee involved in order to use their services. So, right away, you’ll wind up owing more than when you started. The next thing to consider is that these companies normally arrange longer terms for your loans in order to reduce the unmanageable monthly payments. This means that you’ll have a longer period in which you’ll have to make payments. In the end, you could wind up paying a lot more.
And that’s not taking into account any other penalties you may incur. If you are late making a payment or your credit rating is below par, you will be charged late payment fees and/or higher interest rates. Ironically, the people that need these types of loans are the exact people that will be charged these penalties and can least afford it.
Another thing to consider before you apply for a debt consolidation loan is that it may actually hurt your credit. Just the simple act of applying for the loan can lower your score. Add to that, the fact that you’ll be closing several other accounts, and your credit rating will drop even more because now you’ve got less “good reporting” on your record.
Sometimes a condition of the loan requires that you negotiate a “deficiency balance” with your creditors, and that will hurt your credit just as much as late payments. It essentially means that your creditors are willing to accept less than you owe just so they will be able to recoup something. Be aware that it is sometimes legal for creditors to cancel that agreement (this depends on where you live) down the road.
However, the biggest reason for carefully considering using a debt consolidation service is that it won’t really fix the underlying problem that got you into this mess in the first place: poor financial habits. In fact, it’s been reported that even with the lower monthly payments, the majority of people find themselves in even deeper debt than before.
Taking out a debt consolidation loan should be a last resort. If you’ve decided that this is what you want, then you’ve really got to consider all the negative ramifications as well as being committed to changing your spending habits.
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