Over the past three decades, consumer credit has become a booming industry. In recent years, two new businesses have emerged with the consumer-credit industry that are gaining popularity both with business owners and the general public: (1) Lenders offering debt consolidation loans and (2) credit counseling agencies. We see them advertised on television and in magazines almost constantly. Initially, they sound like smart business decisions; but, in reality, they are apt to do more harm than good. Let's look at each one separately and see why.
Debt Consolidation Loans
This is where a third-party company lends you the money to pay off all or most of your current creditors and roll all of the payments into one monthly payment. Most of the time, these types of loans are secured by the equity in your home and are drawn up as a second (or third) mortgage. This is important to take into consideration for several reasons:
•The loan will put a lien on your home, which could mean the possibility of foreclosure if you were unable to make the payments.
•These types of loans tend to be stretched out over a much longer period than the time it would normally take to pay off a credit card. This means that you must take into consideration the total amount of interest you will be paying over the life of the whole loan, not just what percentage rate the company is offering you.
•If you eventually decided that you needed to file bankruptcy, these types of secured loans are not eligible for consideration during bankruptcy proceedings unless you are willing to relinquish ownership of your mortgaged property.
•If you do consolidate your debt without closing your current accounts, it leaves you vulnerable to the temptation to create even more debt. In the lone run, this will seriously jeopardize your financial welfare creating an even larger amount of debt that you will eventually have to pay back.
Credit Counseling Agencies
These agencies are third-party companies that negotiate better interest rates for your current debts and take over your bill-paying process. You send them biweekly or monthly payments, and they distribute these funds to each of your creditors. Again, on the surface this may sound like a smart decision, but their are some important facts you should consider before enlisting the help of this type of company.
◦No one works for free. These agencies are making money, and you are ultimately the one paying for their services.
◦As soon as you add a third party to any type of negotiations, things are always going to get more complicated, not simplified. These agencies will initially contact your creditors and negotiate a better rate; but after that, you will be forced to mediate any correspondences that need to happen between the agency and your creditors.
◦Any time you enlist the help of a credit counseling agency, your credit report is immediately red-flagged. It's possible that lenders see this act as a confirmation of your ability to responsibly handle your own debts.
◦The credit counseling agency will stay on your permanent credit record for seven years after your final debt is paid in full. This means that you will potentially have to live with this mark on your credit record for ten to twenty years!
◦We live in a society that wants a quick fix to everything, and these types of agencies are preying on your desire to have an instant cure. I hope that by now you realize that the best way for you to handle your debts is to do it yourself. With patience, diligence, and determination, you can pay off your debts. It just may take some time.