A lot of people fall into the debt trap, it is no surprise to see individuals deep in credit card debt, student loan, car loan, and mortgage payments all at the same time. It seems like there is no way out and filing for bankruptcy may look like a good option.
Credit cards are being given away like hotcakes. Companies also increase your credit limit on a regular basis enticing you to spend more using your card. This is why more and more people end up spending more than they can pay.
Experts say that filing for bankruptcy should always be the last resort when it comes to these types of situations. This may help in removing your debts, but has the bad effect of a poor credit score for 7 to 10 years.
Another possible solution is debt consolidation, which may be attractive due to easy payment and seemingly lower interest rates.
On the outside, it may look great, but in reality, debt consolidation loans and debt settlement companies make you end up paying more and staying in debt longer.
What Is Debt Consolidation
Debt consolidation is a way of combining all your unsecured debts and placing them in a single monthly payment. No matter how many they are, they can all be lumped up into one single payment.
There are a lot of scams out there who make promises that are too good to be true. If you encounter a company that makes such claims stay away, these companies are usually at the top of the list of those who receive complaints with the Federal Trade Commission.
Due diligence should be done because there are many horror stories involving companies pocketing your monthly payments which leave you into deeper debt and damaged credit ratings. Some would push a low-interest rate plan that really costs more in the long run because of the longer payment period.
Debt Consolidation Methods
One of the more common ways to consolidate loans is through a home equity loan. This is a huge risk because, with your home as collateral, you may lose it via foreclosure if you fail to pay off the consolidated loan.
A debt consolidation company may ask you for a single payment but chose to keep all your debts separate. They just manage your payments by being the one who sends them to all your creditors.
One should take note that debt consolidation does not mean debt reduction. It may give consumers the illusion that they are paying lower monthly payments but in reality, the terms have been stretched so you actually end up paying more due to the longer payment period.
The lower interest promised may also be true, but because you pay for a longer period the interest rate applies to more payments which when added up still causes you to pay more.
In the case of credit card switch of balance, the low or even no interest promo is often an introductory promo which only lasts for a number of months. After this period is over, the rate will go up and may end up being higher than before you made the switch.
Debt settlement is not the same as debt consolidation. Debt settlement involves the hiring of a company that will represent you in negotiating a lower lump sum payment with your creditors.
A settlement fee for this service may range from $1,500 to $3,500. Scammers will advise customers to stop making payments on their debts and pay their debt settlement company instead. Once their fee is fully paid, they leave you hanging resulting in late payment fees and more interest payments, leaving you in a worse situation than you started.
Debt consolidation and debt settlement are not the long-term solutions to your multiple debt problems. What you really need is a plan that will help you cut your expenses and focus on paying your debts as soon as possible. Financial planning should be practiced where the money will be managed the right way. Doing away with bad spending habits and having the discipline to not incur more debts while paying off all your current debts will go a long way to the road to becoming debt free in the future.