Debt consolidation or bill consolidation is a form of financial strategy for merging multiple multiple debts into a single bill that is paid off by another loan.
In simple words, debt consolidation is when you take out a new loan to pay off many other loans, liabilities, or consumer debts. It lowers the overall interest rate, reduces multiple deadlines, and provide the convenience of servicing only one debt at a time.
Debt consolidation is effective on high-interest loans like credit card loans. Debt consolidation can be in the form of taking out a loan or signing up for a debt management program that doesn’t include the option of a loan.
Debt consolidation can be an effective means of regaining control of potentially runaway credit card debt. It gives you freedom by lowering the interest rates on debts and also helps to reduce monthly payments.
Debt consolidation is also known as credit consolidation or bill consolidation. The number one aim of debts or bills consolidation is to get out of debts faster.
However, there are a number of pitfalls of which one must be aware to ensure the process has the desired effect. Ignored, your situation could actually become worse.
So let’s take a look at some bill or debt consolidation questions you may have been afraid to ask.
1. Could I wind up owing more money?
It is very important to identify the root cause of your credit problem before taking on a consolidation loan. Keep in mind, consolidation doesn’t eliminate the debt; it aggregates it.
You still owe the money, but you now owe it in a fashion in which your monthly payments and the overall interest rate you’ll pay are likely to be lower. The amount of time needed to pay the debts off should be shorter too when you do your homework to make sure all of those factors are in place.
Once you’ve completed the consolidation, you will have a bit more disposable income with which to work and all of your credit cards will have zero balances. This combination could tempt you into using those accounts to purchase things again, which is a very bad idea.
You now have the means and the capacity to get into even more trouble if indiscriminate spending is what got you into trouble in the first place.
So yes, you could wind up owing even more money — if you are not careful.
2. Could my interest payments actually be higher?
The whole point of doing a credit card consolidation is to reduce your interest payments and your monthly payments. If you go the balance transfer consolidation route, you’ll likely get a new credit card with a zero percent introductory offer.
In other words, if you pay off the balance you transfer within a set amount of time, you can do so without paying any additional interest. This can be a very attractive proposition.
However, if you miss that window, you could be facing interest charges on the entire balance, going all the way back to when you signed the agreement, which could add up to be a huge amount.
Extending the term of a personal loan, or an equity line of credit used to consolidate the debts could increase your interest payments as well.
The longer the loan the longer you’ll make interest payments, which means the more interest you’ll pay overall. You have to be careful to balance the loan term against the payments and the interest rate to ensure you come out ahead.
So yes, your interest payments could be higher — if you are not careful.
3. Could I lose my home?
You’ll effectively trade unsecured credit card debt for an obligation secured by the value of your home if you go the cash-out refi route, or use a home equity line of credit. In this instance, your home could be placed in jeopardy if you were unable to make the payments as agreed.
Therefore, it is of the utmost importance to be certain you can repay the loan and do nothing to hinder your ability to do so.
Because yes, you could lose your home — if you are not careful.
4. Could I get scammed?
There will always be people who are willing to expend more effort to steal than earn. People with this mindset tend to gravitate toward people who have financial problems like bees to fragrant flowers, looking to make their honey at your expense.
The good news is most of them follow the same playbook, so they can be easy to spot — when you know what to look out for.
However, yes you could get scammed if you are not careful.
The bottom line, the answer to all of those debt consolidation questions you’ve been afraid to ask is yes. Fortunately, though, all you need to do to avoid those problems is exercise prudence, self-restraint, and common sense.
In other words, you’ll be OK — as long as you are careful.
In conclusion: Debt consolidation questions
It is important to pay attention to the payment schedule on a debt consolidation loan. Find out the payment duration, and current interest rates so as to avoid paying more in the long run.
Consolidating debts may have a negative impact on your credit score because credit scores favor long-standing debts with consistent payment histories.
Debt consolidation can also make you lose special provisions like interest rate discounts and other rebates.
You may not need some debt consolidating services if they charge hefty initial and monthly fees. You can decide to consolidate your debts for free with a new personal loan or a low-interest credit card from a bank.
Here are some of the reasons why you should consider consolidating your debts today:
- Debt consolidation is great if you have multiple debts with monthly payments and high-interest rates.
- A consolidation debt may also help you improve your credit score and make you more attractive to future creditors.
- Debt consolidation may also qualify you for a tax deduction or tax break depending on its nature.
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I am Adeyemi Adetilewa, a media consultant, entrepreneur, husband, and father. Founder and Editor-In-Chief of Ideas Plus Business Magazine, online business resources for entrepreneurs. I help brands share unique and impactful stories through the use of public relations, advertising, and online marketing. My work has been featured on the Huffington Post, Thrive Global, Addicted2Success, Hackernoon, The Good Men Project, and other publications.