If you are drowning in a world of high-interest credit card debt, a debt consolidation loan could help pay down debt faster and reduce your monthly payments. But when debt consolidation becomes somethingthat hides the underlying problem rather than repairing it, you could make things worse.
Here are some debt consolidation scams to avoid:
If you use debt consolidation as a cure all. Consolidation loans do not have a great track record, if the supreme aim will be to rise out of debt. Estimates indicate that at least 70 percent of people who combine their debt wind up with as much or more debt a couple of years afterwards. As an example, one might merge credit card debt into just one loan, just to max out the credit cards with the recently discovered accessible credit. Think about it as yo-yo dieting, simply with debt.
Why does this occur? Because getting a debt consolidation loan to make your payments more manageable does not need you to alter your behavior. It Is just like losing weight with a dieting pill; you will likely package the pounds back on after you stop using the pill, if you do not additionally correct your eating habits.
This is not to say consolidation loans are poor. They could be useful tools for managing and paying off. Yet, they will just work over the long term if it is possible to be fiscally disciplined enough to alter your lifestyle to ensure you do not go into debt again.
If you rely on a costly consolidation service. Consolidation loan services, in truth, do not do much that you can not do yourself. And they will often need substantial fees for his or her services: either in interest, in up front fees or in monthly fees when you run your payments through them. Occasionally, such services are a great thought, but not if they are going to run you additional money in the long run.
You’re likely better off looking into debt consolidation choices by yourself. Your high-interest credit card debts into a no- or low-interest choice could be moved by you, take out a home equity loan or maybe get an unsecured credit line.
Just like most matters in life, when you take out the middleman, the prices go down. Try and work out your debt trouble in other ways before deciding on a potentially high-priced loan, if you’re contemplating using a debt consolidation firm.
If you find yourself paying more interest as time passes. That is one concealed issue with debt consolidation loans. While you may lower your monthly payments, those payments usually come at a price–more interest payments. The lower monthly payment may be caused by extending your payments out over more years; it is like getting a 7-year car loan as opposed to a 3-year loan. You Will pay less each month, but your overall interest payments will be a lot higher. That’s true even if your interest is lowered by your consolidation loan.
You may be more inspired to pay them down one by one–a strategy that can leave you with tremendous interest economies as time passes, if you’ve got high credit card or other debt payments. You might make minimal payments, to ensure your payment is less troublesome if, on the other hand, your loans are consolidated by you. Again, this leaves you paying a whole lot of more interest over the life of the loan.
It is possible to use an on-line calculator to determine how much loan consolidation decide whether this is the correct debt settlement strategy for you and will cost or save you in interest.
If you set your house on the line. Here’s where serious troubles can be caused by debt consolidation. Merging your debt onto a home equity loan or line of credit–while a sensible strategy in some instances–sets your house in danger.
If you use a home equity loan, credit line or cash out refinance to consolidate your debts, understand you’re ensuring the loan with the pink slip to your own house. It may look like a great thought–particularly with today’s very low rates of interest, but you are going from unsecured debt to debt that is guaranteed by your most important asset: your house.
If you are considering leveraging your home’s equity to consolidate credit card debt at a lower interest, ensure you will make this additional payment. Additionally, be sure to still have at least 20 percent equity in your house by the time you take out your line of credit or second mortgage. If you default on the loan, you are in danger of foreclosure–just like if you defaulted on your first mortgage.
Consider these factors into account before determining whether one of these debt consolidation loans is suitable for you.