Debt consolidation can seem like a godsend to those who are drowning in too much consumer debt. To combine all of the debts into one, lower interest monthly payment sounds like an ideal solution. But before signing up to consolidate your debts, carefully weigh the pros and cons to decide whether debt consolidation is right for you. Less than honest consolidation companies or higher interest rates may overrule the convenience and savings.
Pro: Feeling of Control
When you're drowning in debt, dealing with collectors calls and avoiding collection notices with no way to pay them all back, you may feel like your financial situation is out of your control. Taking the step to consolidate your debts with one company can give you a sense that you are back in control, making decisions about your financial future, and making the calls and letters stop.
Con: Disreputable Companies
Unfortunately, not all consolidation companies are created equally. While some genuinely seek to help consumers by consolidating debts, others slam you with high interest rates and fees, and don't follow through on the consolidation. Rebuild.org warns that consolidation scams are prevalent, and you must research a company with the Better Business Bureau thoroughly before trusting them with your debt.
Pro: Lower Monthly Payment
When you look at your monthly budget with the many creditors that you owe, you could find you're paying literally hundreds of dollars to pay off or only float your debt for another month. Consolidating your debts with debt consolidators can help you bring down your payment to something a little more manageable. This will help you have a little more wiggle room from month to month and breath a little easier about your financial situation.
Con: More Debt
Debt consolidators agree to take on your debt for a fee. Usually it is a percentage of your debt, but you may also find that interest rates and extra fees are tacked on. This could mean that your debt consolidator, who you are relying on to help you get out of debt, can cause you to go deeper into debt. Read all contracts and agreements carefully so that you know exactly how much debt consolidation is going to cost you.
Pro: Reduce Interest Rates
Some creditors charge outrageously high interest rates, especially if you miss a payment or hit your credit limit. Because of this, the interest you're paying on your balance could even be more than what you own. Using a debt consolidator can help lower your interest rates so that you can work toward paying off the balance, instead of just paying of interest fees from month to month .
Con: Ineligibility and Higher Rates
Credit.com's Nancy Castleman warns against debt consolidators if you have an especially bad credit history. Seeing that you have a low credit score, late payments or nonpayment could mean that the debt consolidator believes you to be ineligible for debt consolidation. They may also charge you higher rates due to your spotty history. Don't rely on debt consolidators if you know that your credit is extremely damaged.
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