There are many debt consolidation programs out in the market, you have pretty choices to choose one among them. Unfortunately, not all programs are created equally, there are pros and cons on each program that you should consider before make your decision to choose one. Here are a few things you need to watch out when consolidating your debt:
1. Interest Rate, Fees and Costs
Debt consolidation programs come with various interest rates and the rates may vary based on your credit score. You may not be able to qualify for the lowest interest rate loan, but one thing you need to make it right is to ensure the add-up interest, fees and costs of the debt consolidation program you are interested in sign up up must be lower than Your existing debts. If you end up need to pay more, then it will make your debt problem worse. Unless you have very bad credit score and need to find a loan with long repayment period to lower your monthly payment, you should always take advantage to consolidate into a loan with lower interest rate than your existing debts.
2. Unethical debt consolidation companies
You may come across advertisements that offer debt consolidation programs at very attractive low interest rate, too low until they look too good to be true. There are also companies publish their fee of consolidating service at very low, some even offer it free. They hide the high charges visually, you can only find it in the fine print of agreement that you may not notice about it when signing it. Therefore, you have to watch out these unethical debt consolidation companies that just want you to sign up with their programs by attracting you with low interest rate, low or zero processing fee. The low-interest rate usually is offered for a promotion period such as 6 months or 1 year, after the period the rate will get back to the normal rate, which may be higher than the interest rate before the debt consolidation.
3. Do not get more than enough to consolidate your debt
You may hear about cash-out consolidation loan that enables you to withdraw some cash from the loan. In other words, you can apply the loan amount that is more than the amount needed to consolidate your debt so that you can cash out the balance from the loan for personal uses. Watch out for potential debt problem because you are creating more debt with the new loan.
4. The risk of debt consolidation with home equity
If you have a home with equity that can be used to secure for a low interest rate loan, you can take advantage to consolidate multiple debts into the loan and save a significant amount of interest. But, watch out for potential risk of losing your home if you do not make the repayment on time. If you want to pledge your asset to secure for low interest rate loan, you have to make sure you are able to make the loan repayment on time every month until it is paid off.
Debt consolidation is a good option to reconstruct your finance to a more manageable level. But, you have to watch out for potential risks as mentioned above when consolidating your debts.