Debt Consolidation Don’ts
It’s easy to get into debt. It may have started in college when you were hit with credit card offers from every direction and racked up thousands of dollars of student loans. Now that debt trails you around like a ball and chain, weighing you down and holding you back. Is there a way to snap the shackles debt has clamped on you? Could debt consolidation be the way to free yourself? Maybe. Maybe not. You need to do some serious research before you try debt consolidation as a tactic. Here are some important missteps you don’t want to take along the way.
Don’t Misunderstand What Debt Consolidation Is
Debt consolidation is not a magic cure for financial problems. There is no instant fix. Whichever method of relief you try, it’s going to take work. You need to understand exactly what debt consolidation can and can’t do for you.
The definition of debt consolidation is moving all possible debt from multiple locations to one centralized point. By doing this, you only have to pay one bill each month. The goal is to make that payment less than the total you are now obligated to pay monthly and to lower the interest rate. If the debt consolidation plan you are considering doesn’t match those criteria, don’t agree to it.
Don’t Look at Just One Debt Consolidation Option
Although you may see some amazing deals advertised, don’t believe everything you read. Most of those offers that look too good to be true are just that. If you’re already struggling to pay the bills, you probably won’t qualify for those rock bottom interest rates they’re advertising. Look at other options before deciding which route you’ll take.
Before making an agreement with a debt consolidation company, consider getting a secured debt consolidation loan instead. You have to put up collateral such as your car or home, but because it is secured, the interest rate on the loan will be lower. There is a risk that you will lose your property if you default on the loan, but it is often the most logical way to consolidate your debts and make them more manageable. Knowing the risk you’re taking can be a great motivator to keep up those payments.
Don’t Sign a Contract Without Doing Your Homework
Although legitimate debt consolidation companies do exist, they are far outnumbered by unethical ones. The latter groups prey on the vulnerabilities of people in precarious financial positions. Before you sign any contract, read it carefully. Look for hidden fees and know how much you will be expected to pay the company for their services. Some groups charge as much as 20% of your total debt. That is not a good deal.
Do some solid research before you choose which company to work with. Look for online peer reviews, check with the Better Business Bureau, and don’t be fooled by pretty promises. Remember, these are salespeople, just like the ones that got you into this situation. They are not saints, they are not miracle workers. They are humans looking to make a buck.
Debt consolidation can be a smart move for some people, but don’t fall into traps that can make your financial situation even more hazardous. Look at every option available, research the companies you are considering, and weigh the pros and cons. You may want to consider talking to a nonprofit debt counselor before you take the leap into debt consolidation.
George Gallagher is a education and finance writer and consultant. He is currently working with graduates to help find solutions to their student loan consolidation needs.