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While debt consolidation is an attractive option for many who are suffering under the burden of mounting debt, it unfortunately does come with significant risk. It is also important to understand that the risk of consolidating one’s debt is not the same for everyone – it can depend on one’s personal circumstances at the time. Therefore getting relief from your debt with a debt consolidation loan may seem like a good idea, it is wise to be aware of all the risks and consequences of this.
3 Risks You Must Know Before Consolidating Your Debt
Will It Realize Real a Real Saving? One of the main motivating factors with debt consolidation is that you should realize significant savings on your debt and be able to pay it off quicker. However this may not always be the case as you may have been a reasonably good payer on some of the cards which would enable you to negotiate a lower interest rate on these individual cards with the threat of moving your business. This could then equate to an overall more favorable interest rate than that which you would realize by consolidating your debt and without the risk.
You Stand to Lose Your Property In order to secure a debt consolidation loan you would probably have to take out a second mortgage or put your property up as collateral. The risk comes if you default on your payments as your house could be at risk, whereas if you default on your credit card all that will be damaged is your credit rating. Whilst you may have every good intention of paying of your debt consolidation loan, the real risk involved with this type of secured loan is that if unexpected financial pressure raises it head as it tends to do, in the way of emergency expenditure or loss of job, you may be forced to miss a loan repayment or two which will subject your property to being liquidated.
Your Credit Score Could Be Adversely Affected A common misconception is that one large debt loan would look better on a person’s credit report than smaller individual debts, however this is often not the case. Your smaller debts & credit cards will have had a track record of some sort & will have built up a certain amount of credibility which would go towards improving your credit score as the age of your accounts counts favorably towards your credit rating. So when all of your smaller accounts & credit cards are closed in favor of a debt consolidation loan, your credit history is shortened thereby reducing your credit score.
So in conclusion, whilst consolidating your credit cards & other debts into one loan may provide significant benefits in terms of savings & reducing the repayment term, it is important to understand the risks involved with consolidating your debt as it could have dire consequences.
PS. – Before restructuring your debt, read about these 5 Debt Consolidation Risks you need to be aware of to ensure your situation is not made worse or that you don’t fall victim to a debt consolidation scam.