What is Debt Consolidation
Debt consolidation may sound tempting to many debtors, but it does not often offer a viable path for consumers to get out of debt. Rather than working to reduce the amount that they owe, the debt is simply transferred from one company to another. The majority of the time it results in debtors paying more money than they would have in their original situation.
The basic concept of debt consolidation is to borrow money at a lower interest rate and lower monthly payment in order to pay off your current debt. However, these are usually "secured loans," meaning that you are borrowing money against your car or home in order for the lender to ensure that you will pay them back. What many people do not look at are the long-term consequences of this transfer. The reason that lenders agree to lower monthly payments as well as lower interest rates than what you’re currently paying is because the period of time over which your debt will be paid off is extended. In the long run, debtors pay a significant amount more than their original debt because the interest begins to stack up over time.
Additionally, debt consolidation is not always an option for those facing large amounts of debt. Chances are you are in a financial situation that prevents you from being eligible for a loan. If you do qualify for and are seriously considering debt consolidation, there are a few consequences that you should be wary of.
One of the first issues with debt consolidation is that it is easy to dig yourself deeper into debt. With lower monthly payments and your credit cards cleared, it can be easy to fall back into the spending habits that got you where you are now. Furthermore, as we already mentioned, these loans take a longer time to pay off, which even at a lower interest rate can often result in spending more money getting out of debt. The biggest concern to a lot of people when considering consolidation loans is what happens when you miss a payment. You then face losing whatever qualified you for the loan in the first place, which, in the majority of cases, is your home.
