When you consolidate into one loan, you most likely will be extending the time to repay. When you do that, it will take longer. If it takes longer, the lower interest rate will become irrelevant because you may end up paying more interest because the debt will be outstanding longer. So, is there a benefit?
Is the Problem Fixed?
Consolidating your debt to one payment without cutting up the credit cards is very dangerous. If you have not eliminated the use of credit cards, you will find yourself with a bigger problem. By not changing your habits and continuing to use the credit cards, before you know, it the credit card debt will be back.
The only problem now is you also have a debt consolidation loan on top of the new credit card debt. What will you do now? Have another debt consolidation loan? Run the cards up again and consolidate yet again? If you keep doing this, you may wonder why you can never get ahead.
Beware of Shady Debt Consolidation Companies
There are companies that will tell you they can get your debt paid off for fractions on the dollar. My advice here is for you to run. Run as fast as you can to get away unharmed.
They will tell you to pay them something less than you are currently paying and, in turn, they will pay the credit card companies. This will continue for some period of time.
Here is what will happen. They will hold your payments. Then, they will not pay the credit cards, putting you in a delinquent positon. They will force the credit card companies to take less than the full amount owed on the debt.
Your credit rating will be trashed because of the late payments. There will be taxes owed on the debt forgiven.
The results will not be pretty. So, like I said run, run quickly to get away. Do not engage this type of company. QCBN
By Steven Calabrese, CPA
Steven Calabrese, CPA, is the CFO of West Yavapai Guidance Clinic. He also is the owner and operator of a website known as thebiweeklyadvisor.com, where topics such as budgeting, investing, paying off debt and goal setting are discussed.