Disadvantages Of Debt Consolidation

To Consolidate Or Not To Consolidate Debt?

That Is the Question…

Whilst the intention of consolidating your debt is to combine all of your debts into just one large one with a consolidation loan provided by one lender.

This means that the consolidation loan will have been used to pay all your individual debts (and creditors) leaving you with just one creditor & one monthly amount to pay.

The idea behind this is that it makes it easier to manage your debt, creditors & monthly payments by having just one amount to pay to one creditor.

The attraction of going through this process is to simplify your debt problem and even being able to reduce your monthly payment amount or negotiating a reduced interest rate by combining all your debts which could be a huge saving.

However, it is not always the best way to handle personal debt & there are unfortunately some disadvantages that come with debt consolidation.

3 Top Reasons Not To Consider Debt Consolidation

A consolidation loan could be the last thing you need and may just serve to compound your financially stressed situation…

1. Debt Consolidation Could Be Just a Con

Debt Consolidation LoansThe problem with consolidating your debt is that it can fool you into thinking that you have solved your debt problem when in actual fact all you have done is swop all of your smaller debts with one big one.

So in actual fact all you’ve managed to do is move your debt around, whilst the problem remains hanging over your head like the sword of Damocles.

2. You Can’t Borrow Your Way Out Of Debt

In most cases, except for those who have lost their jobs suddenly or suffered some other misfortunes, people end up drowning in debt due to their poor spending habits which won’t change just by by consolidating their debt.

People who take out consolidation loans are already in dire financial straits & see it as a magic remedy when in actual fact all it is doing is putting a band-aid on the underlying problem of debt which you cannot borrow your way out of.

3. You Could End Up Paying Far More In Interest

Consolidation Loan InterestInstead of applying for a consolidation loan, one of the most popular ways of servicing your debt would be to access capital from your home loan to pay off your creditors which is in effect consolidating your debt into one larger home loan repayment.

Whilst the interest rate on your home loan is probably significantly less than that of your other creditors, the problem is that your debt is now extended over 20 years instead of the 2 or 3 years of your original debt.

So whilst your monthly home loan interest amount could be lower, you will find yourself repaying your original debt amount off over a far longer period which means far more accumulated interest.

The other peril with this form of financing your debt is that if you default with your loan repayments you could place yourself at risk of losing your home.

Conclusion

Notwithstanding the above, debt consolidation could be the best option available for a consumer to avoid having their possessions, car or house repossessed.

If this lifeline is used sensibly it could be just what an indebted consumer needs to free themselves from the debt trap but if used unwisely it will only make their situation worse.

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