In theory, debt and bill consolidation is a good solution in managing personal debts. Multiple debts with differing interest rates such as personal loans, credit card debts, overdrafts, and car loans are consolidated. Under the consolidated scheme, interest rates are fixed and supposedly lower. The chance of late payments is decreased because of only one due date per month. More importantly, the borrower has only one company to deal with instead of different creditors and third party collection agencies.
However, entering into a debt and bill consolidation plan can also have its disadvantages especially if one is not careful.
Lower Credit Score. When one enters into a bill or debt consolidation scheme, there is a chance that creditors will enter the borrower’s name to a credit agency, which will adversely affect the borrower’s credit score. This will result in being unable to open new bank or credit card accounts. However, this is not a permanent situation. Sticking to the consolidated payment plan and avoiding late payments will increase one’s credit score after a few months.
Additional Debt. Industry reports reveal that there are a percentage of borrowers who avail of a consolidation that revert to higher debt levels after some time. This is likely due to leaving the original credit facilities open or opening new credit card or loan accounts while the consolidated loan is not yet fully paid off.
Home Equity. Those who opt for a secured debt consolidation scheme wherein the family home or property is used as collateral may find themselves with the additional problem of foreclosure later on. Having the home as collateral gives the lender more power over the borrower. This should then be a last option as there are other consolidation programs that do not require collateral.
The idea behind debt and bill consolidation is to make debt easier to manage and eliminate. This consolidated loan payment scheme does work. However, it is not like a magic wand that will erase all debts. Discipline and cooperation from the borrower is a requirement for this scheme to fully work. At the very least, one should make payments on schedule, close down all existing credit, and actually living within one’s means.
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