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Debt Consolidation - Understanding The Risks

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    Debt Consolidation - Understanding The Risks

    When a person has a number of outstanding credit card debts, the convenience of having them all rolled into a single debt through debt consolidation sounds like the perfect way to simplify trying to keep track of everything. Better yet, the debt consolidation will usually lower the overall payment as high interest credit cards are bundled together into a lower interest loan.

    Before you opt for the ease of a debt consolidation loan, however, it's important to know and thoroughly consider the serious risks that accompany these loans. Chances are that the consolidation loan will require you to take out a second mortgage or a home equity loan. If you do this to pay off your VISA and MasterCard bills, you end up trading in unsecured debt for secured debt. The result is that if you default on your payments with the secured consolidation loan, you put your house at risk whereas if you defaulted on the credit cards, your credit rating will be adversely affected, but your house won't be in danger.

    The real danger with using a consolidation loan is if an unexpected emergency arises. Most people have every intention to pay off their debts and the reason they look into consolidating their credit card debt is so that they can do this more effectively. An unexpected loss of a job or other situation that causes a sudden loss of income will quickly make the debt consolidation loan an even heavier burden since the house will be on the line.

    Another growing concern regarding debt consolidation loans is they may not be better than the individual credit card interest rates. This is due to a couple of factors. Those who have various credit card debts, but have kept up on payments can often negotiate for favorable interest rates with their current credit card companies with the threat of moving their business with a transfer if not given a lower rate. These can be as good, if not better, than the interest rate charged by debt consolidation companies.

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    Another problem is those who are in deep debt often have the impression that a single loan will look better on their credit report than a lot of outstanding debt on different credit cards. In fact, consolidation will most likely initially have a negative effect on your credit rating. This is because a key portion to credit scores is the length of time you have had accounts open. By closing all your credit card accounts for the consolidation loan, your credit history significantly shortens.

    Concern should also be focused on the spending habits that got you into the situation when you are considering a debt consolidation loan in the first place. Getting this loan will not magically solve the underlying issues that put all the debt on the credit cards and if not addressed, new debt on credit cards could soon appear. This will only increase the likelihood of default and putting your house at risk. Before considering this option, steps should be put in place so that a recurrence of the credit card debt doesn't occur.

    Another aspect to be wary of when considering a debt consolidation loan is that there are more and more unscrupulous lenders out there trying to take advantage of your debt situation. Some will not fully disclose that you are in fact putting your house at risk with a secured loan. A growing scam is debt consolidation loan companies that guarantee you'll get a loan if you agree to pay an up front fee. The Federal Trade Commission say you should avoid any companies that make such a guarantee for an advance fee. While legitimate consolidation loan companies may require an up front application fee, they'll never guarantee approval of the loan in advance.

    While there are a lot of negative points that need to be carefully considered, they don't mean there is never a situation where a debt consolidation loan is both appropriate and helpful. Depending on your circumstances, you may be able to lower your interest rates in addition to making them tax deductible. At the same time you may also be able to lower your monthly payments while still paying off the debt at a quicker pace. The key is to make sure that you fully understand the pitfalls and have put into place the necessary safeguards on the off chance that the unexpected happens.

    #2
    Yeah debt consolidation usually does more harm than help. when you add in the penalty fees, high interest, and the fact your credit is ruined it ends up costing way more than what you owe anyway

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      #3
      debt consolidation can help you with lowering your interest rates so you can pay your debt off quickly. You just have to ask what up front fees you will be required to pay and what monthly fees they will charge you. Some companies have no enrollment fee and monthly fee is less than $40.00 per month. Make sure they use your first monthly payment to pay your bills and not wait 3 months to a year before doing so. Stay away from company that does this. It will hurt you in the long run.
      Last edited by jeffrey; 11-02-2008, 05:41 PM.

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        #4
        Re : Debt Consolidation

        Debt Consolidation have too much risk and very base line support when anyone have gone through this situation.

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          #5
          Debt Consolidation - Understanding The Risks

          thanks for sharing Debt Consolidation - Understanding The Risks this forum post

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            #6
            Debt Consolidation vs Loan

            The multiple options available to consolidate ones debts can be quite confusing, credit counseling programs, debt settlement, debt consolidation loans, bankruptcy are just a few options available today. Trying to find the best option to suit your current financial situation can be a difficult task.

            Typically, debt consolidation programs are debt repayment programs. They can consolidate most types of unsecured debts from major credit cards to personal and student loans. You choose the accounts you want to enter into the program when joining. Once enrolled, the company will contact your creditors to negotiate more favorable repayment terms on your accounts and possibly reducing your interest rates and it may even eliminate late fees. You will then send that company one lump sum payment monthly which they will disperse to the creditors you enrolled on your account when joining.

            Most so called debt consolidation loans are just home equity loans in disguise. They use the equity built up in your current home loan and use it to repay all of your unsecured debts. These types of loan options usually come with heavy application fees and can greatly extend the amount of time it will take you to pay off those debts. These loans also convert all of your current unsecured debts into a secured debt which is now backed by your home. If you fall behind on your payments you could risk losing your property.

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              #7
              Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan. Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house.

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                #8
                I will write a little example and you will understand

                for example Jim has 15.000$ debt, for 2 year loan 5.000$ at 12% and 4 year loan 10,000$ at 10% a year.. your monthly payment on 5.000$ is 416$ a month and 500% at 10,0000$.. total payment you pay 900$ a month.. The debt consolidation company tells you will pay 500$ per month, and you are happy.. but they don't tell that you have to pay more then 2 and 4 year.. you are paying about 4 and 6 year so your amount is much more then before The debt consolidation..

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