The Traps in Free Debt Consolidation |
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Television is flooded with advertisements showing harassed-looking individuals whose debt problems are solved instantly and painlessly with the help of free debt consolidation.
Figures from the
US Bankers' Association show consumer credit, in credit card balances and
unsecured personal loans are rising at day by day. In this age when debt is threatening to run out of control in the U.S, unsurprisingly, the idea of free debt consolidation is attractive to many borrowers. By consolidating their debts at a competitive interest rate and spreading the repayments over a longer period the argument goes, borrowers can reduce their monthly payments and regain control of their finances. They can do this by transferring credit and store card balances to a single low-interest card or taking an unsecured personal loan to clear other balances. A homeowner could re-mortgage or withdraw equity from the home with the existing lender. Therefore, it is not surprising that a lot of people opt for free debt consolidation, especially since people with previous credit problems are reluctant to approach a high street lender. They are, therefore more vulnerable to the marketing strategies of these free debt consolidation companies. Because of this, FTC officials are concerned that the advertising and marketing strategies used by these companies, do not make clear the amount that the customer will really have to pay. But government agencies are investigating free debt consolidation agencies, which bring all a customer's debts under one umbrella, at a price. This is, because the free debt consolidation loans that these companies promote are usually second mortgages from a personal finance company, secured against the borrower's property. As a result, the second-mortgage sector has expanded faster than even the broader consumer credit market. The Office of Fair Trading estimates that as much as 60% of the second-mortgage market may be arranged to consolidate debt. The trouble, says the FTC, is that vulnerable consumers may be unaware of the overall cost, length or nature of the debt they are taking on. Although most free debt consolidation schemes are neatly packaged, enabling borrowers to reduce monthly expenses and preserve credit ratings, they have significant drawbacks. First, your home, since it is secured against the loan, is at risk of repossession if you don't make your payments on time. Second, they are inflexible. You could find yourself in a difficult position if interest rates rise, pushing monthly payments up. Since free debt consolidation loan interest rates (APRs) start from about 7.9%, they are not as cheap as a straightforward re-mortgage from a lender. And a customer with a bad credit history will have to pay up to three times this amount. Also, these loans can take longer to repay than straightforward re-mortgages. This is, because most agencies bring down monthly payments by simply extending the loan period. So, headline interest rates may be competitive compared to those of many other forms of credit, but the overall cost can be higher because the debt runs longer. Finally, the borrower may have to take out expensive insurance policies, pushing the cost up further. According to experts on free debt consolidation services, about half of clients who seek their services have already been down the consolidation route before, and failed. In some cases, they haven't been able to consolidate the full amount they owe. Others consolidate because they're prepared to pay later to maintain their present lifestyle. Free debt consolidation assistance is available from reliable organizations, such as the Consumer Credit Counseling Service. But some debt management companies levy a monthly charge on clients, which makes the problem worse. Advice is also available via the Internet, phone and branches, and through a new personal loan brokering service all over the country, for those who wish to borrow money. But be wary of offers advertised on the Internet or by direct mail. Their interest rate will probably be higher than those on your credit cards. Even with a lower monthly payment, you will end up paying more because of the longer term of the loan. A safer option is to refinance your mortgage to pay off some short term debt. |
