Why You Should Avoid Debt Consolidation
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Why You Should Avoid Debt Consolidation
If you’re struggling financially, part of the problem might be that you’re overextended each month. Many people have accumulated multiple credit card payments and other debts, and by the time they are finished paying their bills at the end of the month there’s no money left over for saving or enjoying life. In some cases, there isn’t even enough left for necessities.
Sound familiar?
If you’re paying numerous credit card bills each month you aren’t alone.
This is why debt consolidation seems so appealing to so many people. Consolidating at least a portion of debt – usually multiple credit cards – into a single payment can seem like a great solution. Instead of paying $100 or more each month on three, four, five or more credit cards, you consolidate those cards into a single debt and pay a single payment, which is often much lower than the total amount going out for all of the cards.
The trouble is you aren’t actually saving money. And in many instances, a much worse situation is developing, even though you feel as if you are making headway on a monthly basis.
What is Debt Consolidation?
Debt consolidation, in and of itself, is not a bad thing. Consolidating multiple debts into a single debt can help you save money immediately and over time, but only if it’s done correctly.
For instance, if you’re able to take credit card balances from two high-interest credit cards and put them onto one card with a lower rate without paying any fees, you’ve consolidated your debt on your own to your benefit. You’re investing the time and effort into consolidating your debt through a balance transfer and as long as you read the fine print of the credit card to which you are transferring, you should be fine.
Unfortunately, there are those out there that use the benefits of debt consolidation to lure people into a trap that ends up costing them more than had they just paid multiple cred card payments each month.
Why Debt Consolidation Isn’t Always What It Seems
The offer from a debt consolidation company can seem very tempting. In addition to streamlining your monthly bill-paying process, you’re able to have more money left over at month’s end to pay other bills or enjoy your life.
The problem is debt consolidation offers are actually wolves in sheep’s clothing. They look appealing and helpful, but they are designed to bilk you out of your money.
Debt consolidation programs run by companies promising to do the work for you are rarely what they seem.
For starters, they aren’t doing that work for free. Debt consolidation programs are very expensive. And in far too many instances, that expense is hidden in your payment plan, so it’s tough to know exactly what you’re paying and to whom.
Companies that offer debt consolidation claim to lower your debt by “negotiating” with your lenders to come up with a payment plan. And in most cases, these payment plans are ones you could’ve negotiated yourself. Credit card companies are often willing to negotiate new payment arrangements because doing so benefits them – and doing this on your own won’t cost you a thing.
Debt consolidation companies prey on people who are unknowledgeable about how credit card companies work and/or intimidated by the idea of contacting a company and asking for a new payment arrangement. These companies want you to think you’re desperate and your only option is to rely on them for help with your overwhelming debt.
The truth is many companies claiming to offer debt consolidation are actually settlement companies in disguise.
They offer to consolidate your debts, urging you to stop payments on your credit cards and pay them instead. They hold the money they receive from you in an account and then attempt to arrange a settlement with your creditors, once you’ve fallen behind by 30 or 60 or more days on your payments.
They never actually consolidated anything for you, and following their directive to stop making payments to your creditors can result in lawsuits being filed against you – lawsuits you’ll be on your own to defend against because the so-called debt consolidation company won’t help you.
The bottom line?
Working with a debt consolidation company can result in a much worse situation than you’re already dealing with. You’ll pay more in the long run and in many cases, far worse things will happen.
What Should You Do Instead?
The good news is you still have plenty of options aside from working with a debt consolidation company.
As mentioned earlier, it’s possible to consolidate your debts on your own. If you’re in a desperate situation, so much so you’re considering bankruptcy, contact your lenders and let them know how bad things are. Many are willing to work with you because they know if you file for bankruptcy they won’t get any money you owe them. At the very least, an improved arrangement can buy you some time and give you an opportunity to get organized. And if necessary, save the money you need to file for bankruptcy.
You also have the option of settling the debt on your own. There are risks involved, because settling a debt for less than you owe does negatively affect your credit score and it can also have tax consequences. You’ll also need access to a lump sum of cash to pay off the settled amount immediately. But in many cases, creditors are willing to settle a debt at risk for not being paid for pennies on the dollar.
Depending on your situation outside of your credit card debt, you might have the option of using a home equity loan to help you pay off debt. You’ll be consolidating the credit cards into another type of loan, but doing so can save you money in the long run. Just keep in mind you’ve now created a secured loan with your home acting as collateral, so if you’re unable to make the payments on the new loan you risk losing your home.
Finding the best option to help you with debt can be overwhelming. It’s important to remember that leaping into something that seems too good to be true can cost you in the long run. If you’d like to know more about debt consolidation or you’re ready to schedule a consultation to discuss your options, contact us at 1.800.220.4318.