- Debtors seeking consolidation may enjoy the luxury of myriad consolidation options, but each borrower should carefully select the option that best fits his or her individual needs. A borrower with credit card balances, for example, may benefit from the ability to simply transfer balances to a single, low-interest credit card account. A borrower with a number of large, unsecured loans may find a personal loan more effective at paying off outstanding balances. If they are in a position to do so, students may also choose to pay their own tuition and use the low-interest, government-backed loans to reduce their outstanding debt. Finally, homeowners may enjoy the lowest possible consolidation interest rates by using a home equity loan or line of credit to consolidate high balances.
- Regardless of the type of consolidation a borrower selects, he or she should carefully evaluate the terms of the consolidation loan or credit account. Some loans, especially credit card accounts, carry very low initial interest rates designed to attract new customers. After a relatively short introductory period, though, these percentages may quickly escalate to double-digit rates. If the interest rates on consolidation loans rise, interest charges take more of each payment and prolong the repayment period. Consolidation of very large amounts with high-interest rates may take as long to pay off as the original loans, and they may wind up costing as much or even more than the original balances.
- After consolidating a number of loans and credit cards, some consumers find themselves suddenly swimming in an abundance of previously unavailable credit. Although many consumers initially fight the urge to exercise that new buying power, a number of debtors ultimately give in to temptation and begin using credit cards or credit lines to finance new purchases. Before long, these consumers once again amass large amounts of debt, this time complicated by payments on the outstanding consolidation balance. This post-consolidation trap can raise an acute danger for debtors who choose to consolidate using home equity lines of credit, as failure to repay debts secured by a home can lead to foreclosure.
- While a number of reputable organizations exist solely to dole out debt-assistance advice, some scammers take advantage of those burdened by debt. According to an article on MSN's Money Central, debt-consolidation organizations that charge up-front fees often perform the same functions that an individual could do on his own, and some of these organizations perform no services at all.
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