Debt consolidation makes the most sense when a consumer is very deep in debt with high interest rates and large monthly payments. Debt consolidation combined with a debt repayment plan and/or credit counseling can help a consumer pay off all of his debts and be debt free within 3 to 5 years.
Although, this isn’t the case for everyone that is in debt it can offer some relief and give consumers the opportunity to reorganize their finances and in some cases even save a little money. If a consumer feels that debt consolidation is the best option it is very important that he choose a consolidation company that teaches methods on changing spending habits not one that simply reorganizes the debt.
It is equally important that the counselors work with consumers on maintaining the new habits even for a period of time after the conclusion of the consolidation.
The wrong debt consolidation company will make a lot of promises, but not deliver. They will promise lower monthly payments, lower interest rates and the convenience of a single payment. But, in reality they can be associated with high fees, greater debt and potentially more interest payments.
Things to Consider:
- Debt consolidation is not a cure all. The consumer must work on new habits. It wasn’t the debt that got the consumer in the position that he was in it was the consumer’s choices.
- The most expensive service is not always the best service. A good debt consolidation company will not cost the consumer more in the long run. A consumer should beware if the company charges hefty fees for their services in areas such as high-interest rates, high upfront fees, and/or high monthly fees.
- The consumer will be paying more interest over time than if continuing to make their usual payments. Consumers need to be careful because lower monthly payments could result in extending payments which can be more expensive over time.
Unfortunately, the prospect of being debt free is highly romanticized and in most cases debt consolidation doesn’t make sense. Debt consolidation companies are the same as any other financial institution; they are in business to make money. A few tips for consumers to avoid being taken advantage of include:
- Consumers should calculate how much they owe and their current interest rates and then determine how long it would take them to pay off the debts by maintaining their current rates. Once all calculations are done consumers should compare their figures with the length of time they would be in debt consolidation. In most cases a lower interest rate is more expensive than simply increasing the current payment.
- Consumers should also check to see what the monthly payment on a debt consolidation loan would be. If the loan payment is more than what the consumer is currently paying it might be more beneficial for the consumer to increase the current payment. If the loan payment is less than what the consumer pays each month the consumer could end up paying more in interest in the long run.
- Consumers should make sure that if they choose debt consolidation that the company will incorporate credit counseling so the consumer can learn how to use credit responsibly once the debt consolidation loan is paid in full.
- If the consumer is being pressured into a debt-management plan that he pays through the company he should be weary.
- Consumers should watch out for imposters. Any deal that appears to be too good to be true, it probably is.
- Consumers should shy away from companies that promise to remove negative items from their credit reports. If an item on a consumer’s credit report is true there is no way to remove it. The only thing that the consumer can do is make it less negative.
- If a company promises to eliminate debt through obscure laws it probably is not legitimate. A consumer’s debt is a legal obligation and it should be paid back.
Mathematics and Behavior Are the Key to Financial Freedom
Although, it may be very enticing to only deal with one monthly payment it is important for consumers to realize that there are instances where they can do the same things for themselves that a debt consolidation company can do for them and be able to save the money they would be paying the company.
The first thing that a consumer needs to do is to create a realistic budget. The second thing that a consumer needs to do is decide whether to pay the highest interest or the lowest balance debts first. Finally, the consumer would need to set up auto-pay and pay more than the minimum payment each month.
If a consumer decides that debt consolidation is the best route he needs to be aware of his behavior. Paying off debt with a loan doesn’t eliminate the debt it simply combines it and the consumer is still responsible for it.
Consumers who truly want help should do what they can to get it without worrying about what others may think. Debt repayment and credit counseling are great resources to assist consumers in negotiating lower interest rates, establishing realistic budgets, and with gaining control of their debt instead of the debt controlling them.