Taking out a loan is a tempting choice for solving financial woes but there are risks of debt consolidation loans. This is a single loan for the total of all bills that you would like to pay off. Using this loan you eliminate all individual bills and instead pay one loan monthly.
Usually the debt being paid off is credit card related with high interest rates so when paying minimum balances you are paying only the interest. The principle remains and you are not really paying down the debt. With lower interest you are able to actually chip away at your core debt. Debt consolidation loans generally allow you to pay over a longer period as well thus making your monthly contribution smaller.
The Risks of Debt Consolidation Loans
Knowing the risks of debt consolidation loans will help you avoid creating more debt while you’re working to pay off the original.
Hazard 1: Feeling free of debt.
Paying off the credit cards that have been hanging over you is a great feeling but that zero balance can give the false sense of being bill free. You still have to pay just as a single loan instead of many smaller bills.
Hazard 2: Repeating Old Habits
If your reason for getting a consolidation loan is overuse of credit this warning is for you. Now that the cards have so much equity available, you may be enticed to begin using them again. If you can’t control your spending you may end up running up the same card you are still paying off with your loan. The best way to avoid this is to close off your accounts save for one. The single open account can be used sparingly and paid off in a timely manner to fix your credit score or if your score is still intact this card should be kept somewhere you cannot use it for impulse purchases.
Hazard 3: Check that interest rate
If your credit is good or you are able to provide collateral you can benefit from the lower interest discussed earlier. If, on the other hand you have no collateral to put up and your credit score is already low you run the risks of debt consolidation loans interest being higher than that of the original debt and ending up owing more than you did originally. Be certain to investigate more than one lender and various solutions before committing to something that will not significantly lower your current payments.
Hazard 4. Collateral can be the highest price to pay
The greatest equity most people have at their disposal is that of their home. Risking your home for a loan means if you are unable to pay back the loan for any reason you will lose your house. This is true no matter what you use to secure your loan however it is one thing to lose an automobile, piece of jewelry or other valuable, it is a devastating loss to say goodbye to the sanctuary of a roof over the head of your family.
Take some time to seriously consider whether you can avoid these risks before taking the plunge. There are other ways and it is best to investigate each fully and making an educated decision.
Debt Consolidation Loans CAN Work For You
Now that you have considered the risks associated with this type of loan we can discuss the ways you can make it work for you. One useful point is that consolidation loans can be used in a much more flexible way than debt management or settlement which are far more limiting as to the types of debt you can pay with them. Secure loans cannot be included in other debt payment types but loan consolidation can take them under their umbrella as well as loans that not even bankruptcy can forgive such as Federal Student Aid.
Having looked at both the possibilities and risks of debt consolidation loans if you believe this is the right choice for you here are some tips for making the most of the program:
- If the interest is not lower than your current interest keep looking. There are many options such as payday loans, peer loans, secure and personal loans. Do not jump into the first one you check, make sure you’re getting the best possible rate.
- Be sure you’re eligible for the right loan. Good credit and a steady paying job are essential.
- Be prepared. Unlike other programs there is no one there to guide you along the way. Go in with a payment plan and stick to it.
The most important to do is to learn from the situation and avoid repeating mistakes. If you are aware of and avoid the risks of debt consolidation loans you can get yourself out of debt.