Disadvantages of Debt Consolidation
If you’re thinking about alleviating your debt trouble by consolidating your debts, there are some disadvantages of debt consolidation you should consider.
You’re not really paying off your debt. When you use a debt consolidation loan to combine your debts, you’re only reorganizing your debt. Your payments may be easier to make, but you can’t let that fool you into thinking you can handle more debt, because you can’t. In fact, you may even be denied for new credit cards or loans since your debt load hasn’t changed. If that happens it’s for the best.
If you use a home equity loan, second mortgage, or home equity line of credit to consolidate your debt, then you’ve put your home on the line for unsecured debt that could be bankrupted if necessary. If something happens and you can no longer afford to make payments on your home equity loan or second mortgage, you risk foreclosure. Eliminating the debt through bankruptcy isn’t an option once it’s secured by your home.
Debt consolidation may not reduce your monthly payment. There are two ways to lower your monthly payment through debt consolidation. The first is by lowering your interest rate. However, you may not qualify for a lower interest rate if you’ve been late on payments or if you have a lot of debt. The other way to lower your monthly payment is to extend the length of the loan. Doing that means you’ll pay on your debt longer and you’ll end up paying more interest over the long run. It’s not the ideal situation, but it may be the best choice you have.
Your credit score could be affected if you try to consolidate your debts using a credit card balance transfer. That’s because a large part of your credit score (30%) takes into account how much of your credit limit is being used. If a balance transfer puts you close to your credit limit, you’ll face a temporary drop in your credit score. Fortunately, your credit score can rebound as you pay off your credit card balance.
A large balance isn’t the only drawback of consolidating with a balance transfer. Many people sign up for introductory balance transfer offers, but are unable to pay off the balance under the introductory period. Quite often the new interest rate is even higher than the interest rates before you transferred balances. If you haven’t paid off a significant part of your debt, you could be back in the same situation – a large minimum payment that you can barely afford.
These disadvantages are very real, but can be managed if you decide that debt consolidation is the best option for your debt.
Related posts:
- Benefits of Consolidating Debt With a Home Equity Loan
- 6 Ways to Consolidate Your Debt
- Will You Qualify for a Debt Consolidation Loan?
- How to Know When Debt Consolidation is Right for You
- How Debt Consolidation Loans Work
- Clearing Up the Confusion Between Debt Consolidation and Credit Counseling
- Benefits of Debt Consolidation
- Debt Consolidation Loans Make Your Debt Target Easier To Hit
- Debt Consolidation Loans Help You Simplify Debt Payments
- What to Look for in a Debt Consolidation Loan
If you want to get out of debt, but aren't sure what your plan should be, then click here and read the debt consolidation plan.
If you're serious about getting debt free, sign up for the free debt course that will help you lower your minimum payments, lower your interest rates, and get out of debt faster.
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Debt is slavery, and the goal of this website is to help you get debt free.
If you want to get out of debt, but aren't sure what your plan should be, then click here and read the debt consolidation plan.
If you're serious about getting debt free, sign up for the free debt course that will help you lower your minimum payments, lower your interest rates, and get out of debt faster.
Get the course here:
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