Finance

What Are the Disadvantages of Debt Consolidation?

 

Dealing with debt can sometimes be a frustrating and emotionally draining experience. Whether you are struggling with a mortgage, high credit card balances, or a persistent medical debt, your ultimate goal should be to lead a debt-free life. If you feel like you can’t pay the debts on your own, you may consider debt consolidation. 

A debt consolidation loan helps you to pay off your existing loans and combine the balances into a single monthly bill with a relatively low interest rate. Different types of financial institutions offer debt consolidation loans. 

Although debt consolidation provides you with a wide range of benefits, it may also come along with some potential traps. Here are some of the common risks associated with debt consolidation.

Heightened Interest Expense

If you are under financial pressure, you may be tempted to reduce your monthly payments by spreading your debt over a long time. Unfortunately, this will most likely result in you paying more interest. 

As much as you want to keep monthly payments low, keep in mind that every reduction in your monthly repayment will most likely cost you more interest in the long run.

Debt Consolidation Does Not Provide Debt Relief

Some financial experts argue that debt consolidation is like a case of digging one hole to fill another. Basically, debt consolidation doesn’t lower the amount of debt you owe creditors.  You are only converting your small short-term loan into one large long-term debt. 

It means that you are merely combining your debts into one, not reducing them. Technically, if you are over-indebted, you stand no chance of benefiting from debt consolidation. 

You May Slide Deeper into Debt

One of the biggest risks of debt consolidation is that you will apply for new credit without solving your spending problems that caused the problem in the first place. 

Technically, if you take a personal loan to repay your existing loans, you may now have a lot of credit available on the cards you transferred the balances from. Soon, you may be tempted to turn around and start charging on the same cards.  

This will only add to your debt consolidation loan and make things worse. To avoid committing this mistake, don’t consolidate your debts until you have a clear plan on how to avoid overspending or overborrowing.

Consolidation “Help” Rip-offs

When you start looking for ways to consolidate your debts, there is a high chance that you are desperate for help. When you are desperate, you can easily turn to predatory debt consolidators who will do more harm than good. 

While there are lots of genuine creditors ready to assist you, some people will take advantage of your situation to swindle you. 

They may ask for a consultation fee or request you to funnel all your payments through them. Steer clear of such services and always conduct thorough research to identify genuine people who can help you.

Debt Consolidation Can Potentially Harm Your Credit Rating

Some actions you take while trying to manage your debts, such as renegotiating debt terms, can have adverse effects on your credit score. 

If you secure a debt consolidation loan and fail to make your monthly payments on time, you could also be in trouble. Be cautious of your steps to avoid damaging your credit rating unknowingly.