Disdvantages of consolidating you debts
- What is a debt consolidation loan?
- Things to remember
- Debt consolidation advantages
- Debt consolidation disadvantages
Debt consolidation, time to start spending
Although this option may help you save on interest charges, you still have a combined debt, which represents the total of your old debts. If you are not careful, and you still have access to your accounts and credit cards, there is a chance that you will be tempted to use them, therefore go further into debt.
Debt consolidation sometimes only treats the symptoms of debt and does not address the root problem. In some circumstances, snowballing debt may be a better solution. There are other alternatives to a debt consolidation loan, where unsecured debt is not "shifted" to secured debt, but is eliminated through a settlement or payment plan. Debt consolidation can be confusing for many people, so it is helpful to learn about all of your options, and sometimes with the help of an advisor.
Financial institutions may not be flexible
Financial institutions may not be as flexible as your creditors. If you run into further problems, financial institutions will generally be less understanding and may refuse to accept a late payment. You must therefore make sure that this option is the best one for you.
Risk losing everything
The fact that most debt consolidation loans are a secured loan means you can find low interest rates, but it also means the lender has collateral they can attempt to seize if you default on the loan. For most individuals their homes will be used as collateral for a consolidation loan. That makes this type of loan arrangement very similar in nature to home equity loans - which are sometimes referred to as a debt consolidation mortgage loan.
Debt consolidation mean longer payment terms and more interest
Usually, unsecured debt consolidation loans (low debt consolidation loan obtained without owning a home) involve longer repayment term. So, even if your monthly payment is low, you actually end up paying much more in total interest throughout the longer term.