4 Disadvantages of a Debt Consolidation Loan

FinanceMortgage & Debt

  • Author Randy Dehetre
  • Published August 8, 2011
  • Word count 456

If you’ve ever watched day time TV then you will know all about the debt relief and consolidation companies that claim to be able to magically wave away your debt and money problems. Unfortunately the reality is not quite as wonderful as these companies will have you believe, debt consolidation is one of many options that are available to you and may not be the right tool to reduce your monthly debt burden. Here are four disadvantages to taking out a debt consolidation loan.

Turns Unsecured Loan in to a Secured Loan

Your credit card and store card debt is known as unsecured loans because your home is not at risk if you fail to repay the debt. A debt consolidation loan is a secured loan and you may lose your home if you don’t meet the repayment terms. Many people have found out the hard way that a debt consolidation loan wasn’t the answer to their problems and lost their house because they didn’t change their lifestyle or spending habits.

Higher Total Repayment

A debt consolidation loan aims to reduce your monthly expenditure by lowering the amount of interest you are paying each month. However, these loans are for a much longer period of time so you may end up paying out far more in the long run. Unless your back really is against the wall it might be more cost effective to pay off the credit card debt rather than burden yourself with a long term loan where you pay more interest.

Treats the Symptom Not the Cause

Your debt is a symptom of a problem – namely you are spending more than you can afford each month and living beyond your means. A debt consolidation loan will give you short term relief but not solve the problem of over extending yourself each month. There have been many stories in the media about people who took the debt consolidation loan, saw the zero credit card balance and continued to spend as before and got back in to debt.

Heavily Dependent on Your Credit Score

If you are not a home owner then you have limited options for a consolidated loan since it is usually secured on your home. If you are not able to provide a good security then the rates can be comparable with what you might be paying on your credit cards so you are not actually saving any money. Similarly the advertised rates are usually for people with perfect credit scores and who are looking to borrow a large amount, which doesn’t reflect the type of person who is looking for a debt consolidation loan so the rate you actually pay is likely to be much higher.

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