Disadvantages to Debt Consolidation
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. If you have a little bit of forethought on these concerns, it may keep you from getting further into debt.
A large number of the ‘non-profit’ credit counseling companies are hiding behind a scam operation that takes advantage of the indebted person to profit their own business. 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. By going with a debt management company or consolidating your student loans with a bank or some other lender, you will be starting over with the time period, so it be longer before the interest rate drops.
You may be at risk of losing your home, if you consolidate your debts through a second mortgage or a bank loan, because it will be a debt consolidation loan that is secured by your home and failure to pay means great loss. In addition, you are still in debt, and usually with the same amount or only a slightly lower amount. Some people look at the debt consolidation as a form of debt cancellation and that they are free to go ahead and charge up their balances on their credit cards again. Thus, it is easy for a person in debt to end up in even more debt after they consolidate, and there are only so many times you can consolidate. 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.
You may still have to make several payments each month, since some debts may not qualify for a debt management program.
Since some debt management programs do not allow you to make extra payments to your debts, you can’t take advantage of it when you get a boost to your income, such as a raise or income tax return. Should you send them an extra check; they may simply hold that in an account for your next month’s payment. If you have extra money and you are using a debt management program, you should put that extra money into a special fund to take care of emergencies or into savings.
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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