3 main disadvantages of debt consolidation

If you are looking to save money on your loans, you may be tempted to take on debt consolidation, but there are risks involved in doing that.

06:57 25 September 2013

Having many debts to repay on a monthly basis can be difficult to contend with, and this is why many people tend to take on a debt consolidation loan. This can be achieved by merging all of your smaller loans into a bigger one, in a bid to reduce your monthly interest payments so you can repay less than you would otherwise.

But having to deal with a larger loan instead of smaller ones is not something that many people can actually do, and repaying it depends on your current financial state and your  goals for the future. So let's take a look at the major disadvantages involved in debt consolidation.

• Most banks or financial institutions will want you to guarantee for the debt consolidation loan with your own home. This can be very dangerous, as you may end up having to pay back the debt with the house, in case you somehow miscalculated your earnings and extra money;

 

• In some cases, having only one loan does not necessarily mean less interest. Some of the smaller loans that you have merged into the debt consolidation may have had 0 or lower interest rates, and thus the new loan will have a higher interest than the cumulative interests of the loans composing it. Be sure to check the interest you pay before choosing the debt consolidation plan;

 

• The duration of your debt consolidation may be longer than the one of the smaller loans you had, which means that even if the new interest is lower, it will be applied for a longer period of time, and you will end up paying more than you would otherwise;

These are the hidden aspects of the debt consolidation plan, which some financial institutions may try to hide from you, so make sure you take all of these facts into account before applying for debt consolidation, and take care that there is absolutely no risk of you losing the house in the process.