Tell Me Why Is Debt Consolidation Bad?
Posted on May 30, 2009 at 4:16 pm
Can't you pay less interest by consolidating debt? Are there specific things I should be aware of in regards to debt consolidation being bad?
I NEED TO GET OUT DEBT FAST!!!!
Posted on May 30, 2009 at 4:38 pm
It depends how you are consolidating your debt. The standard debt consolidation loans can be "bad" because often people convert an unsecured debt (no collateral attached to the loan) into a secured debt (collateral now attached to the loan).
By doing this, the borrower is putting their property at risk, if for example they take out a home equity loan. In these cases, the borrower is using the equity in their home as collateral for the loan.
If you could be more specific though I could address this further. Do you mean "bad" from a credit or credit score perspective? Or "bad" from a risk perspective? Let me know and I can do my best to provide some additional insight.
Posted on May 31, 2009 at 10:21 am
I also know that one of the problems right now in the debt consolidation arena is companies who are not necessarily up front with potential clients about how exactly their programs work and what risks come along with consolidating your debt.
I know that with debt consolidation loans, one of the other issues is the interest rates at which these loans are extended. I am assuming a lot of the interest rates on these loans are pretty high, but I am not sure what the average rate is? Anyone have any input?
Posted on May 31, 2009 at 10:37 am
Right, and another issue is this-
Many people want to take out a consolidation loan so they can get a lower monthly payment. While that provides immediate relief for some, the problem is the fact that by making a lower monthly payment the person is extending the repayment terms of the debt that they owe. As a result, even with a decent interest rate, the person ends up paying back significantly more than the amount they owe at the time they take the loan out, or what they would have paid back using an alternative apporach.
Posted on June 1, 2009 at 2:47 am
A debt consolidation loan can be "bad," at least from a risk perspective. As mentioned earlier, an unsecured debt may turn into a secured debt--like a home equity loan, for example--and you may be put in higher risk of losing your home if you aren't able to keep up with the payments. Additionally, predatory lenders can actually hike up interest in such a way that the consumer wouldn't be able to keep up with the monthly payments, and in effect, give up the home due to foreclosure.
A number of debt consolidation loans may also be "interest-only," meaning you're only paying interest on the loan but not actually reduce the balance.
Posted on June 15, 2009 at 12:44 pm
Good points by everyone. But keep in mind, for people who have their finances (and even debt) under control, debt consolidation can be helpful also as it allows the individual to make one simple payment per month, and depending on how they consolidate they can potentially save a lot of money as well.
If you are trying to find out what debt consolidation option may be best for you, feel free to fill out a form on DestroyDebt.Com for a free consultation.
Posted on June 25, 2009 at 7:42 am
Simply asking, "why is debt consolidation bad?" is not the only thing someone needs to do before making a decision. It sounds like you need to consider why debt consolidation may be good, and also to look into the different types of debt consolidation. Would everyone agree?
So what are some ways to determine what debt consolidation option may be the best?
Posted on June 25, 2009 at 11:01 am
Less interest is possible here on certain circumstances. The debt settlement company will pay the debt on the first place. So, what will happen is your interest to the creditors will be exempted and you got to pay to the debt settlement company. So you are paying to one and the time will be competitive advantage for you.
Posted on June 25, 2009 at 12:08 pm
Shane- again, you are incorrect. Interest is not "exempt" when a settlement is reached with a particular creditor. In fact, whenever someone is behind on payments, the interest continues to accrue until the debt is satisfied.
For example, someone who falls behind on a $5 K balance may see that balance grow to $6,500 before they can settle the debt. So, when you settle it, you are settling off of the $6,500 and not the original balance before you fell behind.
Also, it sounds like you may be saying debt settlement companies provide a loan to the client to pay off the debt first, and then have the client pay them back? That is also incorrect- debt settlement companies are not providing people with loans.
Posted on June 25, 2009 at 4:38 pm
Thanks for the clarification. So are there any options out there for people who are just looking to get help with interest rates or is that a no-go?
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