Dangers of debt consolidation

Posted on February 25, 2010 | Category: Money Trivia

Obtaining debt consolidation loans, bad credit ones especially, is a great way to help pay off your debt. Debt consolidation loans can even be used to pay off car loans for bad credit. Paying off bad credit car loans will help you save a ton of money on interest; the debt consolidation loan will give you a lower interest rate even with bad credit. However, just like every type of loan there are dangers that you need to watch out for.

One thing that you really need to watch out for is the lenders who promise you how easy it will be to get a loan to consolidate all of your debt. If you haven’t had any missed payments, your credit score is going to be decent so this problem won’t pertain to you, but if you are looking at a debt consolidation loan because you can’t make your monthly payments or have missed a few of them you can end up paying higher interest rates than what you are currently paying. In addition, despite the lower monthly payment, you will end up paying more over time.

Another mistake that people make is they think that the debt consolidation loan company can solve everything for you. In reality, everything that they are doing is something that you can do on your own, you are simply paying them a fee to do it, and the creditors are happily paying them a fee because they are getting their money. For example, a debt consolidation company will negotiate lower interest rates; you can call up the creditors yourself to do it.

Another big mistake that people make is the balance transfer; they switch their debt to a credit card that has low interest rates to get rid of the old high interest rate. What you want to keep in mind is that these low rates only last for a few months, so it can actually hurt you in the end. Not to mention the transfers can start to affect your credit, which makes you look like a bad credit risk. If you do, close accounts make sure you have the creditor mark them as closed at creditor’s request, if it looks like the creditor closed your account it will negatively affect your credit rating.

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