Many debt consolidation applicants operate out of a state of financial urgency. They have reached a point where their many monthly payments may be overwhelming and difficult to meet, and what looks like a quick fix can feel like a lifeline in a time of crisis. This can be a highly stressful, emotional period, which makes them particularly vulnerable to predatory lenders.
For some, debt consolidation can be an incredibly helpful tool in revitalizing their financial health, but if not pursued carefully, a bad loan can entangle you even deeper into a financial crisis. Many lenders will offer to help you reduce your monthly payments, but they will do so only by increasing the length of the loan, often at much higher interest rates than you were already paying. Don’t fall into the pitfall of this short term solution. Often, only a small portion of the payments you do make will go towards the principal balance. The rest is required to pay the substantial interest rate that is set by a dishonest loan lender, whose primary motivation is squeezing out as much money from you as possible.
Another common tendency to avoid is to to lump all of your debt together. Many of your debts, such as your student loans, may already have lower interest rates than what you will be offered through consolidation. Write out a list of all of your obligations and their interest rates. Only the ones with rates above the rate you qualify for should be considered for consolidation.
Make sure the you have the right kind of debt. For the right candidates, debt consolidation can be a highly useful tool in the pursuit of financial well being. If you have multiple unsecured high interest loans which can be rolled into one, such as credit card debt and personal loans, a carefully researched low interest loan can help you navigate your way back to fiscal health. If you are working with an agency who pressures you to include these low interest commitments, this is a red flag that this agency does not have your best interest at heart.
Are you able to address the root cause of the debt? Consolidation should not be used as a bandaid or temporary fix. Once you have your monthly payments under control, it can be easy to fall back into the same habits. Once your credit card balances are paid in full by the loan, close your accounts to avoid the temptations presented by a zero dollar balance.
If you proceed with caution, avoiding unscrupulous lenders while also addressing the factors which led to the accumulation of high interest debt, debt consolidation can be an incredibly valuable tool.