You may see ads online or hear radio spots promising free or no-charge debt consolidation loans. If you do, here’s a quick bit of advice: Don’t believe it. There is no such thing as a free debt consolidation program. Remember, debt consolidation companies are in business to make money. They’re not in business to help consumers who’ve run up too much debt. A credit card debt consolidation loan may be the right choice for you if your credit card debt has reached overwhelming levels. But never think that you’re not going to pay for debt consolidation help. Free debt consolidation simply doesn’t exist.
How Debt Consolidation Works
Debt consolidation loans are fairly simple products. Consumers with high credit card or other debt meet with a company that sets them up with a debt consolidation program. Usually, this company will take consumers’ debts and combine them into one monthly loan, a loan that consumers can comfortably afford to pay each month. As long as consumers make their payments each month on time, they’ll gradually pay down their debt and avoid the harassing calls of the collection agencies. It’s one way for debt-burdened consumers to relieve some of the stress that comes with high credit card debt.
The Negatives
Like all debt solutions, debt consolidation programs do come with certain negatives. Most debt consolidation companies charge high origination fees. They also charge high interest rates. This means that consumers will, over the long run, pay more to pay off their debt under a debt consolidation program than they would if they had paid off their debt on their own. A credit card debt consolidation loan also damages consumer’s credit scores. This is important: Mortgage, auto and personal lenders today rely heavily on consumers’ three-digit credit scores when determining who gets their money and at what interest rates. Those consumers with low credit scores, which they’ll have after taking out debt consolidation loans, will end up paying more each month for whatever money they borrow in the future, at least until they improve their credit scores again.
The Positives
Consumers have to balance the pros and the cons when debating whether they should take out debt consolidation loans. The main positive is the peace of mind that a debt consolidation loan can bring. Consumers won’t have to lie awake nights wondering how many collection agency calls they’ll receive tomorrow. They won’t have to worry that their mailbox will be stuffed with past-due notices the following day. Yes, debt consolidation loans do come with negatives. But for many consumers, these negatives are worth the financial relief that they can bring.