Debt consolidation is often the primary back up plan for someone that can no longer make payments to multiple creditors. Advertisements for debt consolidation companies often make this plan sound like a difficulty-free way to dissolve debt, as if with a magic wand. While debt consolidation can be beneficial, what the companies will not tell a debtor might hurt them. Realistically, the payments for the debt owed may look more manageable. However, the person consolidating their debt must look at the big picture. Debt consolidation is simply bringing in a third party to help centralize monthly payments. This does not necessarily reduce cost unless the interest rate the person is paying on all of the decentralized payments is greater than the one that the debt consolidation company charges. If the debtor is sending payments to multiple creditors but with a low interest rate, it may actually make things worse to consolidate.
Debt consolidation looks like a good idea at first and it does give a slight tax break to the borrower. However, this only lasts for a short time because of the high interest, which immediately negates any gain received from the consolidation. Debt consolidation may offer a slight advantage as far as short-term financial planning goes, but in the long run, it will most likely serve to take the borrower further into debt.
One of the main disadvantages of debt consolidation is that it uses an asset that the borrower possesses as a guarantee of repayment. Some of these debt consolidation plans take anywhere from 15 to 30 years to completely repay. During this time, the borrower’s home or other asset is put continually at risk. If the potential borrower just takes a minute to consider the repercussions of debt consolidation, they could realize that, if they were to lose the home or other important possession from inability to make payments, they would be in even worse shape than they were before. This process tends to turn into a horrible vicious cycle in which the borrower is continually making payments only to have those payments negated by the effect of repossession if they fail to continue regular payments.
One effective method that may be used instead of debt consolidation to put debt into a central place is through credit cards. This only works if all of the borrower’s debt is all credit card debt. But if it is, then one way to avoid using a debt consolidation company is to put all of that credit card debt on the card with the lowest interest rate.
In avoiding bringing in a third party debt consolidation company, the borrower also avoids the potential legal and financial hassle that could result from a smaller debt consolidation company going out of business. If this does happen, the borrower is at risk of having his or her case handed over to a less reputable company. Therefore, this mess just escalates as the borrower is sent from company to company.
In conclusion, debt consolidation may be beneficial in certain cases, but it can also be very risky. Anyone that is considering consolidating their payments should do careful research and fully understand the commitment they are making with borrowing from yet another lender.
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