Many Americans face tremendous amounts of debt. In search of a quick relief, many consider debt consolidation. The promise of lower interest rates and one simple and easy payment a month can sound very alluring. However, the truth is, debt consolidation loans and debt settlement companies don’t help you slay large amounts of debt at all. In fact, many of these companies take advantage of unknowing consumers, you actually end up paying more and staying in debt longer because of their consolidation process.

It is essential to educate yourself about the cons associated with debt consolidation, listed below are the most important things you must know before you even consider consolidating your debt or working with any settlement or debt relief companies.

-When you consolidate, there’s no guarantee your interest rate will be lower.

The debt consolidation loan interest rate is typically set at the discretion of the lender or creditor. The rate amount is determined by your past payment history and credit score. Even if you qualify for a loan with low interest, there’s no guarantee the rate will stay low, all loan rates are subject to increases over time.

-Consolidating your debt means you’ll actually be in debt longer.

In almost every consolidation case, lower payment are arranged simply because the term of your loan is prolonged. Extended terms mean extended payments. Your goal should be to avoid this at all costs.

 

-Debt consolidation DOES NOT mean debt elimination.

It is extremely important to understand that you are paying a company to only restructure your debt, not eliminate it. What you need is debt reformation, not debt rearrangement.

Debt consolidation often promises one thing, but delivers another. That is the main reason debt relief programs continue to rank on top for the number of consumer complaints received by the Federal Trade Commission.

-Debt consolidation companies don’t teach you how to budget.

Often after someone consolidates their debt, the debt grows right back up. Why? Simply because the consumer is never taught how to budget their finances. In other words, the consumer hasn’t established any healthy money spending habits for staying out of debt and building wealth. Part of the strategy behind debt consolidation agencies is the fact that their clients’ behavior hasn’t changed, making it extremely likely the client will go right back into debt.

While the benefit of consolidating your debts into one loan with one lower monthly payment might provide you with a false sense of financial relief, it could also leave you feeling prematurely confident about your financial situation. This feeling may cause you to let your guard down and incur additional debt before you have paid off the consolidation loan, starting the cycle all over again.

     

3 Important Things to Remember if you Choose to Consolidate Debt

 
  • You could be potentially putting your assets such as your home and your cars on the line, which is extremely risky unless you are certain you can stop overspending and faithfully pay off the loans on time.

  • Remember that debt consolidation companies use a variable-rate loan, meaning what if the rate goes down, it may as well go up at any time, in turn increasing your cost of borrowing.

  • Upon consolidation you extend the length of time you’ll be in debt, it will cost you more in the long run than if you had simply paid off those higher rate bills initially, before consolidation.

If it sounds too good to be true, it usually is. The solution to large amounts of debt is never a quick fix, it won’t come in the form of a better interest rate, another loan, or debt settlement. The solution requires you to roll up your sleeves, make a plan for your finances, save and take action to live a debt-free life! Ask us how!