Four Debt Consolidation Traps to Avoid
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Debt consolidation loans are a popular topic these days. As consumers drift further into debt, they are barraged with advertising for loan programs that permit them to consolidate their debt into a single loan payment. In theory it sounds like a good idea, but there are some traps that will cause you to fail if you are in debt and try a consolidation program. Let’s take a look at four common debt consolidation traps.
Using debt consolidation as a fix without changing behavior — Many consumers who have a large amount of credit card debt will consolidate into a single loan payment to pay off their credit cards. Sounds good, right? Not necessarily, if the spending behavior that got the consumer into that debt doesn’t change. A large percentage of consumers with credit card debt end up with the same or greater debt after consolidation loans. This occurs because they see their credit cards have been paid off by the loan, and start using them again. Consolidation loans require a disciplined approach to reduce spending if you really want to reduce your debt.
Relying on expensive debt consolidation services — It may look sensible to hire a consolidation service to reduce your debt, but in the long run it may cost you quite a bit more due to their embedded fees. Frankly, they do what you can do yourself with a little planning and discipline, and you can take the fees you would pay them and use them to reduce the debt further. Don’t fall for the trap just because it looks like too much work to reduce your debt yourself — you can do it.
Paying more interest with a consolidation loan — The trap is that when you consolidate, you may end up with a lower monthly payment. This may appear good on the surface, but that lower payment occurs because you have agreed to pay for a much longer period of time, sometimes many years, which means you will end up paying a lot more in interest. This is particularly true for consumers who have a habit of only paying the minimum payment; you may end up stretching that debt over a very long period. Also, be careful not to pay off one credit card while ignoring the high interest accumulating on other cards you ignore for the time being. This can create very high debt levels, and failure to pay card minimums can affect your credit. Take some time and figure out a payment plan that reduces the balances on all your cards, not just one.
Using your home to secure a consolidation loan — Credit card debt is called unsecured debt, because you haven’t linked that card to an asset you own. If you consolidate your card debt into a loan secured by your home, or use a home equity line of credit, you have put your primary asset, your home, on the line. This may seem like a good idea because home lines of credit have very low interest rates at the moment. Just be aware that you risk your home if you get into financial difficulties later after using your home for a secured loan. Never secure a loan with your home unless you can keep 20 percent or more equity available after securing the loan. And, make certain you can make the loan payments you arrange with any secured loan; don’t guess, do your homework.
AHL Hard Money Loans never loans, but we can help you with your consolidation loans, and even FL Bad Credit Home Loans if the banks or credit unions have turned you down. Contact our representatives at 813-516-5210 and let us help you work out your credit debt issues.