If you are paying down balances on several high interest credit cards, you may be tempted to try one of the most well known debt consolidation programs. It certainly seems like it will be the simpler, more convenient and possibly cheaper option. But it almost seems too easy. Will you really benefit from consolidating your debt?
What Happens When You Consolidate Your Debt?
You will take out a personal loan that covers the debts you wish to consolidate. Then, instead of paying several creditors every month, you will make one payment to your new provider. If you decide that debt consolidation is the best option for your situation, make sure that you shop around for the personal loan that comes with the best rates and terms available.
What's in it for Loan Companies?
When you sign up to consolidate your debt, the way that you pay your bills changes in two significant ways. Most people focus on the immediately noticeable change, but it's important to understand the second factor as well.
- Your monthly payments are lower. This is probably the reason why you want to consolidate your loans in the first place. You've noticed that a sizable chunk of your income goes towards high interest credit card payments, and you want to make this arrangement more manageable.
- You may stay in debt longer. While it's true that you may get a better interest rate on your personal loan, this isn't the only reason why your monthly payments will be lower. Your consolidation loan will most likely be long enough to generate profit for your new lender. So, yes, you will pay less every month, but you'll end up paying more in the long run – Possibly thousands of dollars more if your debt is large enough.
Proceed with Caution
Debt consolidation isn't a Miracle Pill that will solve all of your financial woes overnight. Remember that this particular action won't change the behavior that caused you to end up heavily in debt. If you consolidate your bills and continue to overuse your credit cards, you will end up with an even bigger problem than you're currently facing.
If you pursue this option because you simply can't afford what you are paying every month, make this just one part of an overall credit rehabilitation plan. Make a realistic budget for yourself, stick to your plan, and use any extra money to build up your savings. Debt consolidation is essentially a service that you will pay for over time, so make sure that you benefit from your "investment."
More Credit Rehab
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