Debt Consolidation Loan Consequences
If you like this post, please subscribe to our RSS feed to read our new posts every day.
Debt consolidation loans are touted as the immediate fix for the financial quagmire that is pulling you down. These loans will reduce your immediate interest rates on unsecured debt such as credit cards and signature loans. A single payment that covers all of your unsecured debt is less than the sum of all the individual payments if made separately. At first blush, debt consolidation loans can sound like the messiah of financial sin.
And they can be, but only if the borrower recognizes that this is an extreme measure. Debt consolidation treats the symptoms; it does nothing to cure the overall disease. The disease, for most people who seek relief from debt with a consolidation loan, is overspending. If debt consolidation is not accompanied by a complete change in spending habits, debt overload will return. And when it does, the options for relief dwindle.
In most cases debt consolidation does not reduce the amount of interest you pay on the debt, it reduces the rate of interest. Debt consolidation loans spread the debt over a wider range of years, typically 10 to 20 years. So, you may not, in fact, pay less interest for debt, but in reality pay more.
Another important thing to be aware of is that what was once unsecured debt is not secured, usually by your home. Debt consolidation loans can double your risk of losing your home and can make your home more difficult to sell, should you need or want to. When real estate market values fall, you may find yourself in position where you have far more debt than equity.
Debt consolidation loans can put a family back on the road to financial solvency. But only when accompanied by a radical change in how the family spends money. Financial counselors recommend that the family cut up all but one credit card when the credit cards are cleared by the consolidation loan. Debt consolidation loans will ease the symptoms of too many high interest debt payments going out each month, but only by spreading the debt out for a longer period of time.
