Debt Consolidation - Pros and Cons

Debt Consolidation - Pros and Cons

There are not too many pros of debt consolidation programs, but the cons include a blemish on one's credit rating. Find out how debt consolidation programs can give a person a lower interest rate withhelp from the owner of a debt negotiation company in this free video on debt and money management. Expert: Peter Repak Contact: www.ClearFinancialCompany.com Bio: Peter Repak has been in the debt settlement business for over half a decade. He and his wife founded the Clear Financial Company. Filmmaker: Christopher Rokosz

Debt Consolidation & Management : What Are the Pros & Cons of Debt Consolidation Programs?

Debt Consolidation

This is a debt management strategy that swaps several small consumer debts with one large consolidation loan. This financial strategy is mostly used in an effort to achieve a lower interest rate in addition to perhaps a fixed interest rate on debt with variable and ever increasing interest costs.

The Advantages

Supporters of debts consolidation stress the advantage of eliminating or reducing considerably accrued interest and penalty charges that are owed as well as consolidating payments of all outstanding consumer debts to one single monthly payment. Another advantage is that credit counselors can frequently negotiate much lower interest rates. This has the potential of paying for their counseling fees with future interest cost savings. Other potential benefits of consolidating debt can include steering clear of bankruptcy, putting an end to upsetting collection calls and escaping harsh late fees.

The Disadvantages

Nevertheless, debt consolidation can be somewhat hazardous and is not an uncomplicated, painless solution for each and every debt problem.

Once all of the outstanding debt is paid-off by the new consolidation loan the debtor still owes all of the debt. It's just that the debt has been refinanced to a longer repayment period. The principle amount the debtor owes has not decreased or mysteriously gone away. When advertisements for debt consolidation programs promise to eliminate debt, they mean paying it off slowly over several years with a lower debt payment. Many times the promise of consolidating debt is too tempting and unfortunately some people believe that it will buy some kind of amazing financial witch craft that will shrink piles of debt from many thousands of dollars to a few hundred dollars instantly. Exaggerated claims like these can be found in many ads on the internet and elsewhere.

If The Key is Lowering Interest Rates - Is It Always Possible?

When a debtor needs debt consolidation he or she probably already is in arrears on at least one monthly payment and has damaged their credit report and credit score. It is common knowledge that any bank or financial institution willing to lend many thousands of dollars to someone considered a credit risk for the purpose of paying off other debts will not do so unless the new loan is issued at a much higher interest rate than what the debtor is probably already paying.

Is Self-Service Just As Effective For Much Less?

Should someone pay for a service that most people could accomplish on their own, without needing to seek a lot of help? Many debt consolidation and credit counseling firms promise to handle the whole consolidation process for their clients. Even if it seems somewhat difficult to read credit reports, understand credit scores then take the time to make the required phone calls for the purpose of negotiating better interest rates and lower payments with existing creditors, doing this in many cases is much better than paying a fee of ten percent of the total debt for someone else to do it.

From Bad to Worse

When debtors enter into a contract with a debt consolidator they need to make sure that the firm they hired is trustworthy, with sufficient references and will commit to some type of acceptable guarantee. A customer should never have to abandon a relationship with a debt consolidation company having a lower credit score than when they engaged them. Having a good grip on the total amount of debt due and how long it will reasonably take to pay it off is essential. This is so because when a sales agent from a debt consolidation firm makes a case that it could take thirty-five years to pay the debt off and you are sure that it would only take ten years this can be used as a good test to assess how honest they are in dealing with you.

The First Thing to Do

Whether or not consolidating debt into one payment makes sense or not the first step in debt management self-help is to chop up and discard credit and charge cards. If using them irresponsibly is the root cause of financial problems then continuing to use them will only cause a deeper financial chasm.

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