Debt consolidation plans require that you take out a single loan, which you use to pay off all your debts. Debt consolidation can be a tempting choice when you have a lot of monthly bills, several different creditors, and multiple different interest rates because the result is one monthly payment to one creditor at a single interest rate.
With a debt consolidation plans, your new monthly payment may even be lower than what you owed before, each month, on all your bills added together.
But there are several drawbacks to debt consolidation:
- A debt consolidation loan is yet another debt you’ll have with yet another creditor.
- Your debt isn’t reduced when you consolidate, it’s simply moved from one creditor to another. You still owe the same amount you did before, just to a different creditor.
- Although your monthly payments may go down with a debt consolidation loan, these lower payments are typically the result of your debt being spread out over a longer period of time. You may get several more years to pay off your debt consolidation loan, but that means you could actually end up spending thousands of dollars more in interest to pay your debt off.
- Debt consolidation loans are usually secured, which means you’re required to use your home, car, or other personal assets as collateral. Collateral is basically your lender’s insurance on your promise to pay: Miss your payments on your debt consolidation loan, and you could lose your home, car, or other collateral to your lender. (You don’t run this same risk with debts like credit cards, for example, which are unsecured.)
- Secured loans can never be negotiated or lowered without refinancing – yet another loan on your credit – which is the opposite of what debt settlement can accomplish.
At Nationwide Debt Reduction, we recommend that you stay away from debt consolidation programs. you deal with your debt either by immediately reducing your interest rates and payments through a credit counseling debt management plan or by settling your balances for less than what you owe through a debt settlement program, paying less over a shorter period of time – not by spending more money over a longer period of time just because at first glance, a smaller monthly payment might seem better.