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If you have been in debt for a while I’m sure you have seen “Debt Consolidation” written all over the place. I’m also confident that you know the advantages like the below really well!
Advantages of Debt Consolidation
- Only one payment per month to keep track of
- You can have your monthly payment lowered and more affordable
- Pay less interest in the long run
- You can pay off your credit card debt and personal loans
Is this ringing any bells?
Disadvantages of Debt Consolidation
Before you sign on that dotted line, let’s consider the disadvantages of this arrangement. These are important to make an informed decision for your situation.
Takes longer to pay off. If you are granted lower payments then the life of the loan will be longer. Example: a 12 month loan could be lengthened to 24 months.
Can cost you more in interest. If your loan was extended like the above example you will pay more in interest over time.
Original terms of agreement are no longer valid. Once your credit card and personal loan debts are combined into one consolidation loan your previous agreements are not there to protect you. Make sure you understand the new rules of this loan before you accept.
Could double your debt. Since this loan will pay off your credit cards those balances will be available to you. If an emergency arises you could wind up maxing them out before your consolidation loan is paid in full.
Can’t close your credit card accounts. You want to avoid closing these accounts once they are paid. Your credit score could go down 50 points per card. Ouch!
Large amounts of debt make you vulnerable to scammers. There are a lot of companies out there that are run by scammers. They offer to erase your debts for a large upfront fee. (keep reading to find out how to recognize these scams)
If A Payment Is Missed On The Loan
A loan consolidation company does have harsher consequences if a payment is missed. If you cannot make a payment on time call your lender prior to the date. They will work with you.
If you choose to just miss the payment the first step is increasing your loans interest rate as well as place a late fee charge on your account. This alone defeats the purpose of this loan.
After 90 days, start to expect phone calls day and night from the lender.
Should your account default for 120 days it will go to a collections company. If the collector is ignored your account will be sent to a lawyer. At this point, you will be taken to court.
Keep in mind, that if your account is taken to court before a judge and you don’t show. It is an admission of guilt to the judge. The final consequence from the judge is going to be garnishing up to 25% of your wages. That is $700 to $1,000 per month depending upon how much you make.
Garnishing your wages also means your employer is aware of your financial trouble. Don’t let it get this out of hand. Most lenders will work with you when you’re in a tight spot.
Effects of Debt Consolidation On Your Credit Score
Now, how a debt consolidation loan affects your credit score depends on how you handle your finances during the life of the loan.
Your credit score will go up significantly if you do the following:
- Make all of your loan payments on time.
- You successfully pay off the entire loan without accruing any more debt during that period. Don’t use your credit cards.
Your credit score will significantly drop if you do the following:
- Miss a payment.
- Recharge all of your credit cards.
- Take out another loan.
When you take out the new loan your credit score will drop a few points but in the long run you will have improved your score well beyond those few points lost.
Debt Consolidation Scams To Be Aware Of
There are scams out there that prey on individuals with high amounts of debt. They know that if an individual is desperate enough they can almost convince them of anything.
Scammers will pose as debt consolidation lenders, debt relief companies, credit repair companies, and auto loan modification lenders.
Here is what you need to look for in order to avoid getting caught up in a scam.
- The offer to help was unsolicited to you. You received a notice in the mail or through a robocall on the phone.
- They promise they can lower your debt before even knowing your situation.
- The company is pushy or aggressive with you. This doesn’t give you time to think or research what they are offering.
- They won’t share information with you.
- They tell you to stop contacting your creditors. This causes you to miss payments and gives the scammer a little more time to get money out of you.
- They charge you a large upfront fee before they complete a single service. If they complete any services at all.
Final Thoughts
In the end, debt consolidation loans can make repayment a lot easier. Who wouldn’t want only one due date and interest rate to keep track of? Just be aware of the scams and your spending habits before you go through with this option.
If you still don’t have a working budget, are overspending, tempted by credit cards with empty balances, or don’t have an emergency fund stay away from this option. It will only do more damage than good.
Remember, you are not in this alone!
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