All you need to know about debt consolidation

Starting a debt consolidation loan is a great way to get rid of your debt, but there are many risks that you have to consider

07:30 07 September 2013

Debt consolidation helps you to pay all your debts with a one-time large loan, which is usually long term and requires your house as collateral. It may seem the ideal solution, but here are the risks that you have to consider before applying for debt consolidation.

• If you don't use debt consolidation for the sole purpose of reducing your bank debts, you may go deeper into debt and not afford to pay it in the long run;

 

• there are more types of debt consolidations, each of them having different interest rates; if you don't look carefully into that, you may pay more interest than you would otherwise;

 

• if the interest rate that you pay on your debt consolidation is higher than the one you pay on your other loans, than the debt consolidation doesn't actually help you get rid of your debts, but increases them;

 

• some interest rates for debt consolidation loans are not fixed, this means that it can go up in time; others are fixed, but not for the whole period, which means again that in a few years it may actually increase, so you need to make sure that you can pay it;

 

• debt consolidation requires your home as collateral, which means that your own house is at risk during the whole loan period; this is why you need to be absolutely sure you can pay the full debt consolidation (which is a long term loan!) before signing it;

These are some of the major risks involved when taking debt consolidation. Analyse them carefully and always look for alternative solutions. Creating more debt to get rid of your debt should always be the last resort.

 

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