Disadvantages to Debt Consolidation

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Thursday, March 26th, 2009 Subscribe To Our Feed

When you are thinking of going to a debt consolidation company, there a few concerns to be aware of as well as the advantages offered by debt consolidation. Some prior idea of how these concerns affect debt consolidation for you could be a life saver down the road.

There are a profound number of scams and ‘non-profit’ credit counseling companies which are actually only for-profit companies. These kinds of companies do not have your best interests at heart, and you may be worse off than before you approached the company.

The benefits provided by a credit counseling company are actually benefits you can get by merely asking your creditors for them yourself. An example of this is student loans that are managed on a schedule where after a certain number of on time payments the interest is charged at a lower rate. If you go with a debt management program or consolidate your student loans with a bank or other lender, you start over with the time period, so it can actually take longer for your interest rate to go down.

If you finance your debt consolidation loans through a second mortgage or bank loan it will be a secured loan and if you do not pay the bill you are taking the risk of losing your home. In addition, you are still in debt, and usually with the same amount or only a slightly lower amount. Too many people think that debt consolidation pays off their debt and they no longer have to be worried about it, so they go back to running up huge credit card bills again. A person in debt who chooses to consolidate can ultimately end up in more debt and it is possible to consolidate only a certain number of times. Before choosing to consolidate your debt, it is important to have the right frame of mind and the self control to not end up in the same circumstances you had before.

Another disadvantage to a debt management program is that you cannot get new credit during this time and for some people, this is a good thing, as they need to learn discipline to ensure they do not get themselves into debt again.

It is not likely that all of your debts will qualify for debt consolidation, so you will still have multiple monthly payments after debt consolidation.

One other disadvantage could be when you get an income increase, by way of a raise or large tax return, some debt management programs do not allow one to make extra payments ahead on your debts. An extra check may be placed in an account at the debt consolidation company to be your next month’s payment. When consumers who use a debt management program have extra money, they should put it in a savings account or a fund for emergencies.

The person who wants to use debt consolidation is the best judge of whether the advantages outweigh the disadvantages in this type of plan.

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