Debt Consolidation Risks
Considering our current economic woes, there are thousands upon thousands of people looking for a way to solve their debt problems, and you can hardly move for seeing adverts espousing debt consolidation as a way of reducing your monthly debt repayments. These adverts paint a very attractive picture of what's involved - freedom from money worries, an end to overdue bills, and the calling off of recovery action.
The idea is that by loading all your debts into one single loan you can secure for yourself a more manageable financial life, less stress caused by financial juggling acts, and more money in your pocket every month to boot. To anyone struggling with debts, this would seem ideal - but is it really so simple?
There is definitely a case to be made for debt consolidation in many cases, and naturally enough the adverts focus on the positives, but there are also some less attractive aspects it's vital to consider before taking out a loan of this kind. Only by considering the bad points as well as the good can you make a sound decision on whether it's a good solution for your debt problems.
Lower Monthly Bill, Higher Interest?
The only two ways to get a lower monthly debt bill is to either be approved for credit at a lower interest rate, or to spread your debt repayments out over a longer period. While a combination of both tactics is the most usual outcome, it's rare to see a consolidation package which doesn't involve a longer repayment term.
The result of this is that even though your interest rate may indeed be lower, the fact that you're taking longer to repay means that your overall interest bill will be higher.
Whether or not this is a concern depends on whether your current problems justify the higher long term expense of trading a lower monthly bill for a longer repayment term.
Future Spending Can Wreck Consolidation Efforts
Another point to bear in mind is that consolidation can feel like the slate is being wiped clean. Your finances will be back in order and all your debt worries will - in theory - be over. This is obviously desirable, but this feeling of a fresh start will not survive long if you resume your spending on your paid off credit card accounts and other lines of credit you have available.
The situation can easily end up much worse if you go down this route, as you'll be paying for your consolidation loan while also having to meet the bills caused by the new debt you're racking up.
The obvious way to avoid this difficulty is to cancel your old accounts as soon as they've been settled, and this is definitely a strong priority.
Secured Debt Means Increased Risk
Most debt consolidation loans are of the secured variety, meaning that your home is used to secure the loan, and this means that you're effectively converting unsecured debt into secured debt.
Your home will be at risk if you don't keep up with your repayments on a secured loan, which isn't the case with credit card debt and other unsecured borrowing.
This is a very important point to consider, as no matter how bad being harried for unsecured debt is, losing your home is another matter entirely and one which you'd definitely want to avoid leaving yourself open to if at all possible.
Consolidation Loans - The Complete Picture
So far, we've painted a pretty poor picture of debt consolidation as a method of sorting out serious debt problems. But is this picture really complete?
Debt consolidation can definitely be an effective way of relieving serious debt problems, albeit at the expense of more interest in the long term, but be sure that you don't let the marketing men fool you into applying for one of these loans without fully considering the consequences, risks and costs involved.
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