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The Risks of Debt Consolidation Loans
The language of finance can be difficult to understand, especially if you’re approaching it from beneath a mountain of debt. Thankfully, nonprofit institutions such as CreditGuard of America are here to help you find the right way to get out of debt.
If you’ve fallen behind on paying your monthly bills, or if you’re worried about falling behind, there are a number of resources available. Debt consolidation can help you lower your interest rates and keep track of your various bills by consolidating them into one smaller, more manageable monthly payment. Not to be confused with debt consolidation loans (which we’ll dive into below), debt consolidation in its purest form helps you keep track of your payments by making it easier for you to pay them off.
How Debt Consolidation Loans Work
Because “debt consolidation” is a term that is thrown around a lot, it’s important to know what exactly a debt consolidation loan is. First, debt consolidation and debt consolidation loans are two very different things. And while some consolidation loans may sound like a good idea, they’re often a risky plan for solving debt. In fact, some consolidation loans could turn out to be bigger problems in the long run because the majority of people who use them fail to conquer debt at the source: their financial habits. On the other hand, debt consolidation programs not only help you get out of debt, they teach you the necessary skills to stay out.
Let’s compare the two approaches a bit further:
- Debt consolidation is the process of combining your various unsecured debts, or debts that aren’t attached to a particular asset like credit card bills and student loans, into one manageable monthly payment. This is what we provide at CreditGuard of America.
- Debt consolidation loans absorb a bunch of smaller debts and reorganize them into a single larger loan to take their place. It is the funds from this new loan that go towards paying off the previously held debt, on the condition that the new loan is paid off instead. Debt consolidation loans can actually hurt your credit because in many cases your new interest payment will be higher, meaning you’ll have to stay in debt longer and pay even more interest over time. Worse still, in order to qualify you may even be forced to use your home, car, or other assets as collateral.
The Disadvantages of Debt Consolidation Loans: A Closer Look
While consolidation loans may seem like an easy way out of debt, there are a few downsides. In fact, some consolidation loans can turn out to be bigger problems in disguise.
- They often require credit checks and have an array of criteria, making it difficult for you to qualify.
- If you can manage to qualify at all, you may end up with a comparable interest rate but extended over a longer period of time. As a result, your new consolidation loan may end up costing you more than if you had paid off your original loans instead.
- You risk losing any collateral if you should happen to default on the loan.
The ultimate risk you take when relying on a consolidation loan to clear your financial slate is the often inevitable rebound into more debts down the road. A debt consolidation loan does nothing to improve your financial spending habits; it’s merely just another loan and another option to help you pay off your debt. Because of that, you run the risk of maxing out your credit cards again, thereby adding your new loan’s payments to the already heavy credit card payments that landed you in debt in the first place.
Whether you decide to use a debt consolidation loan or a more tailored debt consolidation program to help stabilize your finances, you should still consult with a reputable credit counseling agency first to ensure you’re taking the right steps to long-term financial health.
Making the Right Decision
Before resorting to risky loans to help solve your debt challenges, give our credit counselors a call to work through a solution that is right for you. We’ll work WITH your creditors to lower your interest and lower your monthly payments by up to 60%. Not only that, but our credit counselors will develop a tailored debt consolidation plan that will simplify your debt burden and ease the process of paying it all off.
After a free consultation to determine exactly how much you owe, one of our certified credit counselors will then contact all your creditors and personally negotiate with them on your behalf in order to bring your accounts current, reduce or eliminate your interest, and discontinue any unnecessary penalty fees.
Debt Help and Relief
Contact us online by filling out the form above, or call CreditGuard of America at 1-800-500-6489 for more information on our nonprofit credit counseling and debt counseling agency.
Certified Credit Counselors are available Monday - Thursday 8:00 am - 10:00 pm Eastern, Friday 8:00 am - 9:00 pm Eastern, Saturday 10:00 am - 6:00 pm Eastern.