Debt Consolidation Advantages and Disadvantages are becoming an increasingly popular choice among Americans with debt problems. Why are they becoming so popular? Debt Consolidation has many benefits and can be a great way to avoid bankruptcy. Read on for more information about these benefits and disadvantages of Debt Consolidation.
Debt Consolidation Advantages and Disadvantages One of the primary reasons people use debt consolidation services is to avoid or reduce their chances of filing for bankruptcy. The benefits? Debt consolidation companies often argue that borrowing cash from a debt consolidation company to pay credit card debts or individual loans at a lower interest rate will save you money, especially if you have variable-rate loans. They may also claim that by refinancing or consolidating your credit card debts into one loan, you’ll only have one payment to deal with, instead of having to keep track of all the individual credit card payments every month. Or, they may point out that a Debt Consolidation company can help negotiate a lower monthly payment for you. There are a few disadvantages to this, however.
If you’re already behind on one or more of your credit card payments, and you plan on completing a Debt Consolidation plan, then you will most likely have to take out another single loan to pay the previous debts. This means you will have to start paying multiple loans again, instead of just one. You will also have to deal with multiple interest rates, with a longer repayment period, and with different terms and conditions attached to the new single loan. In short, if you’re already struggling to stay afloat, trying to figure out how to make one more monthly payment can put you even deeper in debt.
Debt Consolidation Disadvantages The biggest drawback to debt consolidation is that the majority of those using this method don’t get any of their debts eliminated. Instead, they just see their score falls a little bit, which lowers their credit score. This can make it difficult to buy a house or to even get a decent job, since a low credit score makes you less eligible.
Another disadvantage to debt consolidation is that many times, the loan that you receive is actually a high interest loan. In fact, these loans often carry much higher interest than the original loans that you took out. What’s more debt management companies also charge an annual fee for their services. Finally, debt management companies often have to report your payment history to the credit bureaus as a part of your credit score maintenance. If you’ve been paying your bills regularly, you probably won’t need a loan of any kind for a very long time. But if you’ve been missing payments or late on payments, the bureaus will be quick to report these things to the credit bureau, causing a drop in your score.
Debt Consolidation Advantages The first advantage to debt consolidation is that when you get a new loan, you’ll pay a lower rate of interest. Since your old debts are now paid off, your monthly payments will be significantly lower. Also, since your payments are lower, you’ll be able to make more timely and more consistent payments. This will increase your credit score i.e.
Debt Consolidation Disadvantages This one I find to be the biggest disadvantage to debt consolidation. That’s because the one thing that most people forget is that you need to make all your payments on time. Many people don’t keep track of their payments, thinking that they’ll eventually catch up. But, most of the time, paying your bills late isn’t really a “catch-up” action – it’s just a way to hide their delinquent payments. Another thing is that by paying late, you’ll be reported as a delinquent borrower on your credit reports for 7 years. And that hurts your credit score.
The most common disadvantage of debt consolidation is that borrowers sometimes forget to cancel their credit cards. This is something that can easily be fixed – simply call your credit card company and ask to transfer your balance to a lower interest debt repayment card. Another disadvantage of debt consolidation is that many borrowers think that taking a new low interest debt consolidation program is going to magically wipe away all of their past late payments and charge-offs. This simply is not true. Most of these programs do not erase charge-offs and late payments.