With more individuals taking on debt and others being stuck in debt, consolidating may be a good idea. There are a number of debt consolidation companies that have taken advantage of the situation. While others are just scams, there are, however, legitimate payday consolidation companies that operate ethically.
The aspects that make such companies ideal is that they offer lower interest rates and enabling you to pay off your loans in a shorter period of time.
Therefore, one needs to be wary when looking for a debt consolidation company. Below are some of the pitfalls of debt consolidation that you need to look out for:
Use of secured loans
A home equity loan is a secured loan, whereas a credit card debt is an unsecured loan. You may be urged to take up a home equity loan so as to pay off the credit card debt.
This will then place your home as collateral, yet this is something that you could avoid if you used an alternate way of getting out of debt.
Securing your loans using your home as collateral is a risky affair and as seen in recent cases, this has led to foreclosure. Do not use secured loans, especially when you may encounter a challenge in repaying your loans.
When you consolidate debt, you get the chance to pay off your loans in smaller amounts over a longer period of time. Most debt consolidation companies offer competitive interest rates on debt consolidation loans.
However, you need to ensure that these rates are favorable as some may charge higher rates. A higher interest rate charged when you are consolidating the credit card debt and other loans would end up being more costly in the long run.
Also, debt consolidation companies may entice you with low-interest rates. Later on, you will find that these rates are applied only for a specific duration of time after which they are increased. This adds to the amount that you will be expected to pay.
Consolidating credit card debt
You may have a number of credit card debts and would like to make it easier to pay them off by reducing the monthly bills as well as the interest rates charged on them.
If you consolidate credit card debts, it means that you will put all of these debts into one credit card. The attractive feature related to credit card debt consolidation is the deal in which no interest is claimed in the first year.
While this sounds good and even looks good on paper, it is yet another pitfall that you need to look out for. This is because such cards have hidden costs that may end up costing you more if you had not consolidated the debts.
Going through financial counseling may be the best option if you are in debt and want to avoid filing for bankruptcy.
Getting out of debt would be a great relief, but you should be wary of the impact your actions will have on your finances. Although debt consolidation appears to be an attractive option, ensure that you will avoid certain pitfalls.
Ensure that your finances are not hurting any further because debt consolidation companies may not openly disclose such pitfalls to you.