Debt Consolidation Risks
The disadvantages of debt consolidation should be carefully considered before rushing in.
Whilst consolidating your debt can certainly bring a significant amount of financial relief, you need to be aware that there are certain risks associated with debt consolidation.
In fact the disadvantages of debt consolidation are so real that it’s entirely possible for you to be placed in an even worse off debt situation.
5 Significant Risks With Debt Consolidation Loans
Having all of your debts & credit cards rolled into one big debt can be attractive option especially when one considers the savings that can be realized.
Whilst the above may be true, knowing the risks that come with a secured debt consolidation loan may help you avoid some of the pitfalls.
1. Your House as Security
In order to secure a debt consolidation loan you would probably have to take out a second mortgage or put your property up as collateral.
The risk comes if you default on your payments as your house could be at risk, whereas if you default on your credit card all that will be damaged is your credit rating.
Whilst you may have every good intention of paying of your debt consolidation loan, the real risk involved with this type of secured loan is that if unexpected financial pressure raises it head as it tends to do, in the way of emergency expenditure or loss of job, you may be forced to miss a loan repayment or two which will subject your property to being liquidated.
2. Are Savings Actually Realized?
Another thing to look out for is that when having all your credit cards rolled into one debt you would expect to realize a significant saving through a lower interest rate, however this may not always be the case as you may have been a reasonably good payer on some of the cards which would enable you to negotiate a lower interest rate on these individual cards with the threat of moving your business.
This could then equate to an overall more favorable interest rate than that which you would realize by consolidating your debt and without the risk.
3. Your Credit Score Could be Adversely Affected
A common misconception is that one large debt loan would look better on a person’s credit report than smaller individual debts, however this is often not the case.
Your smaller debts & credit cards will have had a track record of some sort & will have built up a certain amount of credibility which would go towards improving your credit score as the age of your accounts counts favorably towards your credit rating.
So when all of your smaller accounts & credit cards are closed in favor of a debt consolidation loan, your credit history is shortened thereby reducing your credit score.
4. Commitment to Repayments
The reality of what got you into your overwhelming situation of debt also needs to be taken into account.
For instance if it was a case of poor discipline when it came to making the required credit card payments and so the same could happen when it comes to paying off a secured loan – with dire consequences which may not just be limited to losing your home.
So whilst a debt loan may provide significant relief, it is not going to magically solve your financial problems & as new debt arise the likelihood of defaulting on these payments increases.
5. Debt Consolidation Scams
Some unscrupulous lenders that go under the guise of providing consolidation loans for debt relief fail to disclose that by signing for such a loan you are putting your house at risk.
Furthermore another scam by these type of lenders is that they demand an upfront fee for guaranteeing a loan – a loan, in reality, can never be “guaranteed” until you have been assessed & all procedures have been performed.
It should also be noted that whilst a legitimate lender could in fact ask for an upfront administration fee, they would never expressly guarantee that you will be successful in applying for such a loan.
Whilst it’s important to understand the risks involved with taking out debt consolidation loans, depending on your personal circumstances, consolidating your credit cards & other debts into one loan may provide significant benefits in terms of savings & reducing the repayment term.
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