Debt Consolidation: Cure All or Trap?

Often compared to a politician, debt consolidation companies offer an abundance of promises, but always seem to fail in their delivery. While many of these companies guarantee lower monthly loan payments, decreased interest rates and single payment options, the reality is that most consumers experience higher fees, more interest payments and even greater debt.

In fact, many people enter into debt consolidation agreements in hopes that their credit will improve and they can purchase a home in the near future. If someone is drowning in financial debt, especially credit card debt, consolidation loans can help, but only if the consumer pays close attention to common consolidation traps that should be avoided.

• A Consolidation Cure-All – Most people’s ultimate goal is to decrease their overall debt and become debt-free. Statistics show that most people who use debt consolidation services actually end up with more debt within three years. This is similar to a yo-yo diet, where someone doesn’t want to change the root cause of their behavior, which is spending habits. Debt consolidation doesn’t require any behavioral or lifestyle changes and they are useful for paying off and managing debts. However, these types of loans benefit the financially disciplined who don’t want to get further into debt.
• Expensive Services – Most people are better off without expensive debt consolidation services. Often these types of services charge arm-and-leg fees in the form of interest, monthly fees or an upfront payment. Ultimately, this costs the consumer more money in the long run. Home equity lines of credit may be used to help pay off debts and a zero-interest credit card is also a less expensive option.
• Compounding Interest – While some companies boast lower monthly loans, they often hide exorbitant fees in the form of interest. It’s the same as getting a 5-year car loan instead of a 2-year one – people pay less each month, but ultimately they pay more in the long run.
• Home Equity Loans – While this type of loan can prove helpful in decreasing overall debt, it does put one’s house on the line. This type of loan is non-negotiable with payment terms and must be put as a priority, as with a mortgage payment, so the bank doesn’t foreclose on a home. If someone is looking at taking out a home equity line of credit against the home, it’s best that the home have a minimum of 20-percent equity. That way if the mortgage defaults or the homeowner faces selling the home in the near future, the home will have enough equity to be profitable, instead of selling it for a loss.

As with any type of loan, there are options that are best for certain individuals. Better than Loans strives to offer hard money loans, as a direct lender for commercial building loans, construction financing, short term bridge loans, monetization, equipment financing and land development.