Why You Should Stay Away from Debt Consolidation Companies

The average American is currently carrying a personal debt of $90,460, according to Experian’s Consumer Debt Study. Carrying a large amount of debt can cause consumers tremendous stress and insecurity while also potentially negatively affecting their credit score. These factors lead many consumers to consider, “Is debt consolidation a good idea?”

While debt consolidation can sometimes work out, for many people, it causes increased debt and anxiety. If you find yourself in this frightening situation, you need Loan Lawyers, the foreclosure defense, debt defense, and bankruptcy solution law firm in Florida. Call us today to schedule a consultation.

Here are some of the disadvantages of debt consolidation loans:

Florida woman filling out debt consolidation loan form

There’s No Guarantee Your Interest Rate Will Be Lower

Many consumers turn to debt consolidation companies and loans because they want to prevent their debt from growing larger and to simplify things. They think that they will have one bill and a lower interest rate, so what is the disadvantage of a debt consolidation loan? This thinking may be inaccurate.

In his piece “The Truth About Debt Consolidation,” financial expert Dave Ramsey explains that a debt consolidation company does not have to offer a lower interest rate than what you are paying now. Any extension of credit to you will be based on your past credit behavior and your credit score.

If the debt consolidation company believes you are a poor credit risk, it may not offer you an improved interest rate. If you don’t pay attention or are desperate for any help, you may accept this rate and just wind up paying more in interest over the life of your debt.

Consolidating Your Bills Means You’ll Be in Debt Longer

One of the major disadvantages of debt consolidation loans is that you may wind up making payments over a much longer period than you would if you paid your debts out as originally agreed.

Consolidation companies often can offer a better rate or payment amount because you are ultimately taking more time to pay off the debt. Debt consolidation companies know that you are probably feeling financial distress and that a lower payment will make you feel better. However, when they “help” you make more payments over the life of your loan, they will receive more profit.

Additionally, debt consolidation companies often charge extra fees that add to the overall cost of your debt. These are charges you would not be subjected to had you not taken out a debt consolidation loan. Service fees, loan origination fees, and other charges may add thousands of dollars more to your debt. Some consolidation companies may charge a fee based on the total amount of debt you are consolidating with them.

Lower Interest Rates on Debt Consolidation Loans Can Change

If you do receive a lower interest rate, it may be only an introductory offer. This is especially true if you have opted to transfer a balance to a new credit card instead of debt consolidation companies.

These offers may say that you will receive a 0% rate or a low-interest rate to entice you. However, three or six months down the line, you may see that the attractive rate suddenly morph into an unattractive one. This can ultimately cause you to tack on additional debt.

If Your Behavior with Money Doesn’t Change

According to financial experts, the major disadvantage of debt consolidation loans is that debt consolidation does not cause you to change any of your money behaviors. This means that getting out of debt has a lot more to do with your relationship to money and how you manage it than it does with financial literacy.

Many people who take out a debt consolidation loan will transfer their credit card debt to the loan but then shortly after that run up their credit card balances again. This is because getting the consolidation loan did not get them to consider how they got into debt in the first place and how to avoid it in the future.

To build wealth, it is necessary to develop good money management habits and get to the core of why the problems arose in the first place. If you just take on more debt to pay off old debt, you might only be delaying the problem rather than working on proactive ways to resolve the issues once and for all.

Alternatives to Debt Consolidation You Should Consider

Using a debt consolidation company is not the only way to get out of debt. There are several alternatives that you might want to consider, such as:

  • Decreasing Your Expenses – If you do not have enough money to make your obligations each month, you may look into ways to decrease your expenses, such as:
    • Moving to a less expensive home
    • Cutting out cable television
    • Reducing non-essential spending
    • Switching utility, phone, or internet service providers
  • Increasing Your Income –In today’s economy, many people are adding “side hustles” to their careers. Adding a side-hustle, taking on overtime at work, driving for Lyft or Uber, or becoming a personal shopper for shut-ins are all ways to increase the amount of money you bring in the door. Even a little extra applied to the balances on your debt can get you out from under your debt burden sooner.
  • Increasing Your Debt Repayments –If you can increase the amount of money you devote to debt repayment, you may be able to shave years off the life of your debt. Even a small increase in payment amounts can result in a big difference.
  • Setting a Budget – Setting up a budget and then tracking your spending can show how much money you earn, expect for certain expenses, and spend. This can help you determine if you need to decrease expenses, increase income, or take other action.
  • Working With a Credit Counselor – You might consider working with a credit counselor who can help analyze your situation and make recommendations on how to improve your financial outlook. They may also be able to reach out to your creditors directly to secure lower interest rates or a waiver of certain fees.
  • Negotiating a Settlement – Another alternative is to negotiate a settlement directly with your creditor for an amount lower than your actual debt. This process usually cannot begin until the debt is in arrears for several months.
  • Filing Bankruptcy – If you have done all you can to pay off your debt but are still having trouble making ends meet, you might need to consider the financial relief that bankruptcy can provide.

Contact Our Debt Solution Law Firm for a Free Consultation

If you are considering “Is debt consolidation a good idea?” or recently received an offer you want to vet, reach out for professional legal services from Loan Lawyers in Fort Lauderdale, FL. We are a foreclosure defense, debt defense, and bankruptcy law firm. We are committed to providing the financial solutions you need for peace of mind. Contact us today to learn more.