Debt Consolidation Secrets You Need To Know
When you’re neck-deep in debt because of student loan payments, credit cards, and car loans, debt consolidation seems like the right solution due to the promise of lower interest rates and one monthly payment instead of several.
Debt consolidation means combining several unsecured debts into one large debt. In reality, debt consolidation promises you one thing but delivers another. Here are some secrets you should know about debt consolidation before you make a decision.
Debt Consolidation Doesn’t Guarantee A Lower Interest Rate
The lender sets the interest rate of the debt consolidation loan based on your credit score and past behavior, so there’s no guarantee the interest rate will be low.
Lower Interest Rates Can Change
Even if you get a lower interest rate on the debt consolidation loan, there’s a possibility it will change. This is particularly true for credit card balance transfers. You are offered a lower interest rate as an introductory promotion. After some time, the interest rate eventually goes up.
Be on the lookout for such special low-interest deals around the holidays. Many holiday shoppers tend to overspend then panic when the bills come, and some companies like to use this behavior to their advantage.
Consolidating Debt Doesn’t Eliminate It
When you consolidate debt, you restructure it, not eliminate it. What you need is debt reformation, not debt rearrangement.
Debt Consolidation Means Staying In Debt Longer
When you consolidate debt, your monthly payment may be less, but your loan term gets extended. This means you’re going to stay in debt longer than you would’ve if you hadn’t consolidated your debt. Your goal should be to clear your debt at the earliest possible.
Debt Consolidation Doesn’t Change Your Behavior With Money
Most often than not, people who consolidate their debt are likely to go back into debt. This is because they haven’t adopted good money habits to steer clear of debt and build wealth, and have no game plan to spend less.
The fastest way to get out of debt is to get to the root of why you have money problems in the first place—you need to change your perspective about debt. What you need is the right plan, so roll up your sleeves and start working on a strategy that doesn’t involve relying on a better interest rate or taking another loan.