The Risks of Debt Consolidation

The Risks of Debt Consolidation

Debt consolidation generally means you take out one loan to pay off many others.

The most common reasons for debt consolidation are to:

  • reduce interest rate repayments, and
  • make it easier to repay debt through having only one monthly repayment

A debt consolidation loan can be secured or unsecured.  Sound complicated?  Let me explain…..

It is quite common for people to consider debt consolidation when they have high credit card debt.  Credit cards often charge high rates of interest on the balance owing.  This can make it difficult to get on top of the debt, particularly if the amount owed is large, and making only the minimum monthly repayment can mean that the debt actually grows over time.

A person wanting to consolidate their debts can roll a number of unsecured loans into one, single unsecured debt.  This could be in the form of a personal loan.  Personal loans can attract lower interest rates than credit cards.

This may seem a good option for people who have a level of debt that they are not comfortable with but their income is sufficient to pay back the debt over time.  The reduced interest rate of the personal loan could mean savings in interest over the life/duration of the debt.

Another form of debt consolidation is to roll a number of unsecured loans into one secured loan.  Because a secured loan is less risky for the lender, secured loans will often offer a lower interest rate.   This may look like an attractive option.

But the down side is that a secured loan is far more risky for the borrower and a default on this kind of loan can have life-changing ramifications.

A secured loan is where an asset is ‘secured’ against a loan meaning that if the debtor defaults, the creditor can take possession of the asset.  Basically the asset owner is agreeing up front to the forced sale of the asset in the event that the loan is not repaid.

What if the secured asset is your house?  If you are unable to make a repayment against the loan, you could be in danger of losing your home.

Whether secured or not, while debt consolidation loans can mean that monthly repayments are lower due to a lower interest rate,  the total amount repaid can also be much higher if the loan is paid over a longer period of time.

In other words debt consolidation may keep you in debt for much longer than is necessary and cost you more money in the long run.

There may be other options that will allow you to pay off your debt, while avoiding unnecessary interest payments and fees, and enable you to take control of your finances more quickly.  It is wise to educate yourself about all the risks and advantages of debt consolidation.  A savvy debtor can shop around for the best deals, know what questions to ask and avoid the pitfalls.

If you are not sure about the advantages and the risks of debt consolidation, you can seek help from professional debt administrators.

Settle Debt will provide you with a free saving estimate.   When you contact Settle Debt we will look at your circumstances and then recommend a course of action designed to help you avoid unnecessary expenses while paying off your debt.