Debt consolidation is big business. It is not hard to see why it can be an attractive proposition to those who are in debt. It basically means that you combine all your loans into one. Then you will only be left with 1 payment to make each month rather than the 10 that you currently have. That convenience is not the only attractive factor. When the interest rate on the new loan is lower than what you already have, it will be hard to decide not to go ahead.
But it is not always this straight forward in the real world. Companies that offer credit are after all, profit-focused. And the costs of funds mean that there is a limit on how lower an interest can be offered to you. And because some of the smartest people in the world operate in the finance industry, you can expect gimmicks to come along with it. These are 6 questions to ask before consolidating your credit cards.
What are the fees required to open the account?
Surely there is going to be an administrative charge for opening the facility for you. Although not unheard of, the lender will be very generous indeed to waive this fee when you are already offered rate way better than what is available in the market. There could also be annual fees, redemption penalty charges, late payment fees, etc. Read the fine print.
How is the interest calculated?
There are many ways interest in calculated. So complex are some of them that only established professors will be able to truly comprehend the dynamics of how they work. There is effective rates, flat rates, reducing rates, fixed, etc. You want to know how the numbers with what you are paying are determined.
Will interest rates change?
To really know this, you have to read up the terms and conditions of the facility you are signing up for. Taking it at face value from the officer is often not reassuring enough for you to sleep soundly at night.
Are you really saving any money?
Very often, you don’t end up saving any money at all. It is just that the tenor is extended resulting a lower monthly payment. This creates an illusion of savings. But this will ease your cash flow. So it really depends if cash flow or savings is your priority. Sometimes working with percentages can be complex. The best way to determine what you will save is to calculate the actual charges and sum them up accordingly to compare side by side with each other.
Will the loan be sold?
Surely you would want to know who your creditor is. The mortgage crisis was cause by mortgages be sold to investors to a point where home owners no longer who they are paying. This could happen to your debt consolidation loan as well. It is best to know beforehand what is going to happen. A new owner could have new demands which give you new headaches to deal with.
How will the consolidation affect your credit?
It might not be as straight forward as you think on how the new consolidated credit card facility will be recorded in your credit history. Bad credit can give you a lot of problems in the long run. And getting them amended can be very difficult as well. Prevention is better than cure.