If you’re considering a debt consolidation plan, then you’re already aware of the benefits that a loan like this can provide for you and your family:
Lower monthly payment
Lower interest rate
Higher credit score
Single monthly bill instead of several
But did you know that these are only potential benefits and that they aren’t guaranteed? Are you aware of the potential drawbacks?
Debt consolidation can be a big help for many people who do it properly, but many people who use these types of loans end up worse off in the end.
Here are some things you need to know before deciding to consolidate your debts.
Your Debt Hasn’t Gone Away
Lower monthly payments and lower interest rates do take a load off your shoulders, but don’t get too comfortable just yet.
You still have all that debt.
You still have to pay it all off.
What you’ve done is combine multiple loans and credit card accounts into a single loan. But the debt itself hasn’t gone anywhere.
Interest Rates Could Rise
Most debt consolidation plans include an interest rate lower than what you’re currently paying – either as an introductory rate for 6-12 months or for the entire term of the loan. But that won’t always be the case, especially for those with a poor credit history, low income and low credit score.
Some offers will have a variable rate, meaning it could go up or down over time.
Your loan rep will spell it all out for you, and it will all be written down in your contract. So double-check those numbers before making your decision.
You Might End Up Paying More Instead of Less
Some types of debt consolidation loans might even have zero interest for the first 12 months or so. But if the loan is not paid off by then, you’ll be retroactively charged the full interest rate going all the way back to day one. So this could cause your balance to suddenly jump up by thousands of dollars once that intro period is over.
Not all consolidation loans have that feature, but some do. Either way, since your loan repayment plan often stretches out your payments over a period of several years, the total amount you pay could end up being more than what you would have paid in the first place – even though the interest rate and monthly payment amount was lower than your original debt terms.
Debt Consolidation Alone Won’t Solve Your Debt Problem
In the end, debt consolidation is a short-term solution to what might be a long-term problem. While many people get stuck in debt due to circumstances beyond their control (e.g. job loss, medical emergency, natural disaster), many get in trouble because they are in the habit of spending more money than they earn month after month.
Consolidating your debts can help you get on top of your bills, but you still need to address the root problems that created those debts in the first place.
If you’re interested in seeing if debt consolidation is a good fit for your situation, contact Emerald Valley Financial Services today.