Dangers of Debt Consolidation

No one feels good when they have debt. Debt makes people helpless and irritable. They limit how much you can save each money for a long time, depending on your loan tenure. And if you have multiple debts, you need help. This help comes in the form of debt consolidation.

Debt consolidation lowers your monthly payments, interest rate and makes repaying loans simple. However, even debt consolidation is not a risk-free option.

To make sure debt consolidation does not make your life worse, you need to understand its dangers before you make a choice. Below given are the four major risks one can face with Debt Consolidation.

You could fall deeper into debt: Your first priority is to pay back your current debts and to ensure you don’t fall deeper into debt. However, with Debt Consolidation, there is the risk of just that.

Let’s say you take a personal loan and a balance transfer to repay current debts. This frees up your burdened cards, which means you’ll have a lot of available credit on those cards. However, if you start using those cards again, you’ll soon be having a debt on your debt consolidation loan. Thus, this is where you need to tread lightly.

Further, don’t go into debt consolidation before you have a plan to avoid overspending. Create a budget and stick to it. Create an emergency fund too and seriously decide not to use your credit cards to make new purchases.

You may end up paying more in interest: You take debt consolidation to lower your interest rate, right? Now, a balance transfer credit card or a personal loan can give you 0% for a few months, giving you much lower interest rates than all of your current credit card debts.

However, at the end of the day, your interest rate is not the only thing in your interest to be paid. Your tenure for debt repayment has a big role to pay as well in counting towards the interest rate.

You can take a debt consolidation and lower down your monthly payments by extending your tenure, but then your total costs shall be even more since you’ll be paying over a longer period of time.

If you want to avoid this, consider making your monthly payments, or more than that if you can manage, to repay your debt faster. But do make sure you don’t incur any prepayment charges.

There are consolidation scams: Unfortunately, there are some unscrupulous lenders who are in the market only to find customers who are in grave financial difficulty. The problem is that these loans are not good for your finances.
You’ll have to deal with high interest, longer tenures and various other unfavourable terms. And if you miss a payment, you’ll have to deal with exorbitant penalties.