THINKING OF CONSOLIDATING YOUR DEBTS? Take Note Of These Risks


Since more people have access to better-paying jobs at present, compared to a couple of years ago, the quality of living has also increased. People tend to spend more, sometimes more than what they actually earn and, as a result, end up in debt. One of the most common remedies to multiple debt problems is debt consolidation.

Debt consolidation, simply put, is taking out one relatively low-interest loan to help pay off several high-interest but smaller debts. For instance, people who need to pay a number of credit card bills may get just one loan (usually against a collateral, like a house) so theyd worry about only one financial obligation.

While debt consolidation seems like the perfect cure to multiple-debt woes, it is not all sugar and spice. There are risks involved.

Most of those who turn to debt consolidation are in dire need of finances. And because debt consolidation programs are marketed in a way that makes them look like saviors for those who need money fast, people tend to just plunge in without bothering to read the fine print.

Here are just some of the risks linked with debt consolidation:

- The loan you take out to consolidate your debts is relatively low-interest. However, it transforms unsecured debt to secured debt. If you fail to pay this loan, you wont just end up homeless (if you placed it against your home), youll also have difficulty applying and qualifying for other financial deals in the future.

- If you default on a secured loan, you will lose your home (your collateral). This is worse than having a bad credit rating from not paying credit card bills on time.

- Debt consolidation fosters false confidence in the borrower. Because you just have one headache now, you tend to feel secure. In reality, you are not. You are still in debt.

- Most borrowers dont really learn from their mistakes. After they consolidate their debts, chances are, they will still go out and use their charge cards without a care. Most wouldnt even change their spending habits and, eventually, will end up deeper in debt than before they decided to consolidate.

- Out of desperation, sometimes, people dont do their homework and learn more about the loan anymore. More often that not, they take the loan without sitting down to asses whether they can actually keep up with the payments, or if they can still handle it when an emergency suddenly occurs.