December 18, 2017

What is Debt Consolidation?

Can debt consolidation help rid you of bad debt, safely? Home loan, car loan, student loan, credit cards, store credit, medical bills—all are common examples of high-dollar debt that the average American could have. Credit cards are some of the worst, usually bundled with inflexible repayment terms, penalties, fees and high interest rates that could have you hog-tied to your fat-cat credit card company for years.

If you owe money, you have debt. Millions of Americans, as many as a quarter, are in financial debt up to their eyeballs. When the going gets tough, debt consolidation products and services “promise” to fix your debt problems. Can they really make your debt more manageable?

Debt Consolidation: What It Is Not

At first glance it seems that debt consolidation products simply roll your loans or lines of credit into one neat product—a personal loan or home equity loan.  Voila! Done. Advertisements often give the impression that your debt may be reduced, or that you magically are relieved of much of your debt.

This simplification can lead to common and dangerous misconceptions about debt consolidation.

Technically, a debt consolidation loan replaces your other loans. The lender, be it a bank, a credit card company, or other type of financial company, pays off your loans and then writes you a new one. Your debt doesn’t disappear; it just gets moved around a bit. This new loan is then bundled with its own terms: fees, repayment term, interest rate, and more.

Dangers of Debt Consolidation

Debt consolidation is attractive to many people and for good reason. The common misconception is that a debt consolidation loan will wipe out or vastly reduce, the amount of money you owe to lenders. Guess what? Not true.

  • Debt consolidation will not reduce the money you owe.
  • Debt consolidation will not “get rid” of your debts.
  • It will not solve your poor spending habits.
  • Debt consolidation can cost you exponentially more in the long-term than the total original value of your loans.

At best, debt consolidation can:

  • Reduce the number of monthly payments you make each month. This doesn’t mean you’ll owe less.
  • Help reduce the amount of money you pay out each month. This also doesn’t mean you’ll owe less.

A debt consolidation product is good for lightening the load each month, but in turn you will end up paying out more, owing more, once all is said and done for your debt consolidation loan.

Solving Your Spending Issues

The risks? That debt consolidation only enables you to continue spending, racking up another mountain of debt. Most financial advisors suggest that if you must resort to a debt consolidation product or strategy, choose your lender wisely and use the product to your advantage. Consult a financial specialist for help reigning in your finances and getting your debt repaid for good.

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