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The
Downsides to Debt Consolidation |
There's no doubt you'll have heard plenty
about debt consolidation loans - our TV screens are full of adverts
promising freedom from financial worry, and the internet is
positively flooded with solicitations to lock in a low rate with a
refinancing package.
If you're having difficulties keeping
up with your bills and credit repayments, or even facing the
prospect of recovery action on overdue installments, then the idea
of debt consolidation can be very seductive. By combining all your
current debts into one single loan, the theory goes, you'll be
benefitting from both a reduction in your monthly repayment amount
and a lifting of the stress caused by constantly having to juggle
your finances.
But is debt consolidation really as simple
as all that? Of course there are benefits to restructuring your
financial life in this way, and the adverts aren't shy of pointing
out the positive side, but before embarking on this course of action
there are a few negative aspects you'd be well advised to consider.
Only then can you make a fully informed decision on whether debt
consolidation is right for you.
Firstly, in order to secure
a lower monthly repayment you either have to get credit at a lower
interest rate, or spread your payments over a longer period. Most
consolidation packages rely on a combination of both, but it's
almost certain that the deal will involve a lengthy loan term. This
means that you'll be paying interest on your debt for longer, and
the total amount of interest you'll be charged will in the long run
be higher. You may feel that this is a price worth paying for
reducing your monthly bills to a more manageable level, and you may
indeed feel you have little other choice, but it's a point to bear
in mind.
Another potential problem with consolidation is
that, in a sense, you're giving yourself a fresh start financially.
You're wiping out all those worrying debts and getting your finances
back under control. This is of course a good thing - but you'll be
left with all your old credit card accounts with a zero balance, and
all the temptations to spend that that may provide. If you're not
careful, you could end up in an even worse situation - having to pay
back a large loan while running up new debts at the same time.
This pitfall can of course be avoided by cancelling your card
accounts at the same time as you clear the balances, and it is
strongly advisable that you do this.
The final problem to
bear in mind is that by consolidating you will probably be shifting
unsecured debt into a secured loan using your home as collateral.
This means that if, in the future, you fall behind with your
payments, you could risk losing your home as your creditor calls in
the debt through foreclosure. This is a serious drawback, and if
most of your current debt is unsecured then you might wish to
explore every other possibility before tying it up to your home.
So, is debt consolidation an altogether bad option for sorting out
your finances? Not at all. It can be a very effective strategy for
dealing with problem debts, but it shouldn't be entered into
blindly, no matter how attractive the advertisements may appear.
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