Many people get into debt because they were paying for college, helping their children, or paying for unexpected expenditures such as medical bills and car repairs. Other people make mistakes they later regret and buy things they shouldn’t have, but once they realize the error of their ways it’s too late. Unfortunately, a Debt Consolidation Loan is one of the most common solutions people think of when they fall into financial difficulties. This is a problem because most people who get a debt consolidation loan find themselves in much deeper financial trouble than they were in to begin with.
Debt consolidation loans transfer debt from one place to another. While this may sound good, since many times it can appear to lower your monthly payments, a debt consolidation loan will not reduce the amount you owe. You will still pay back 100% of the debt consolidation loan, plus interest. The interest rate is sometimes lower than before, but this is because debt consolidation loans are usually secured loans that cannot be lowered or negotiated. Once you sign up for a debt consolidation loan, you have just gone from an unsecured debt to a secured debt and have put your personal assets (e.g. your car or home) at risk. At that point if you can't pay your bills your creditors can come and take your personal property - thus creating a bigger problem than you had to begin with.
Some of the downsides to debt consolidation are as follows:
- Debt Consolidation loans transfer the debt from one account to another and typically takes unsecured debt(s) and changes it into secured debt (usually your home). If you do not have enough equity, bad credit, or too much debt, it is not likely that you will be approved for a debt consolidation loan .
- Statistics have shown that people who obtain a debt consolidation loan find themselves in deeper debt than they were originally in within a two year period. You cannot borrow your way out of debt. Ask yourself why you would want to go from an unsecured loan to a secured loan to be paid over a longer period of time?
- If you start missing payments on the consolidation loan, you stand to lose the asset (usually your home) that the loan is secured against.
