Oct
26
Debt consolidation loan pitfalls
Filed Under Home Loans
I wrote about some of the benefits of debt consolidation loans yesterday and promised the follow up on some the reasons why you should think carefully before taking out a secured loan to resolve debt problems. Well here it is!
A quick recap. A debt consolidation loan is a single loan, mostly secured against your home, that replaces unsecured loans such as credit and store cards which charge high interest with one loan with lower interest charges because you are house as security. Total interest charges are less and you can use the loan to pay of all debts and get your life and finances back on track.
It sounds a good idea, and for some it is.
Here are a few things to think about though.
Firstly, you still owe the same amount of money with a debt consolidation loan. Yes, the loan can resolve overdraft situations and their associated costs, and save you money on interest rate charges, but at the end of the day, you are still in debt by the same amount.
Also a secured loan is often taken out over ten years or more, so even though the monthly payments are less, you can actually pay more total interest over the term of the loan.
By taking out a debt consolidation loan which is secured against your property, you now own less of your house. Imagine counting all the bricks in your house and then taking some away, because that it what you have given to the lender when you secure a loan against your house.
A debt consolidation can help debt problems but it can’t cure them. This is an important point. If you overspend on your credit cards because you don’t want to wait to pay for nice things by cash then you have to be careful that you don’t continue with that course of action when a debt consolidation loan clears all your credit cards. If you continue to max out credit cards then not only are you in debt again, but that debt is on top of the consolidation loan debt.
You must change the way you borrow money when debts have been cleared by a consolidation loan. The ideal situation is to clear your credit cards and then cut them up!
For those who can modify their spending behaviours, but have encountered unusal circumstances that have created debt problems, a debt consolidation loan can be the ideal solution to get back on your feet again, remebering that your house is at risk if you fail to meet loan repayments.
However for those with no self control when it comes to spending and borrowing, a debt consolidation loan can drive them deeper into debt difficulties and may result in debt management programs, an IVA or even bankruptcy.
