Debt Counselling News
| Risks of Debt Consolidation |
Debt consolidation is a common way of approaching debt that has spiraled out of control. It involves taking out either a secured or unsecured loan from a lending institution to settle all the current debts that you have accumulated. In other words, you go further into debt in order to get on top of your current debts. The result is that all of your debt is merged into a new loan, ensuring that you are only responsible for a single payment as opposed to several payments into numerous accounts. Debt consolidation simplifies your finances, gives you a lower interest rate on your combined debt and procures much needed time in the case of imminent bankruptcy. Of course, there are risks associated with taking out any loan, especially when you’re using additional debt to settle your current debt. These risks are easily avoided if you can recognize them and address them accordingly. The Risks
After taking out a debt consolidation loan, your credit rating will initially take a hit. Taking out another loan essentially eradicates all progress that you may have made towards paying off your current debts. However, the reality is that nothing will hurt your credit rating as much as bankruptcy. While the initial blow to your credit rating may seem self-defeating, the long-term disadvantages of an entirely tarnished credit rating will be even worse. On the flip side, if you recover from the initial blow and get on top of your finances, you will ultimately end up with a better credit rating in the end.
A debt consolidation loan will allow you to settle several accounts. However, beware of the mindset that would make you believe that your debt has disappeared. In fact, your debt has been consolidated into a new loan. When you see that your account balances are R0, you should not take it as a green light to start accumulating debt again. If you continue to spend money that you don’t have, you will only undo the benefits of a debt consolidation loan. Accumulating more debt after you’ve just consolidated your debt is a dangerous move, and one that is likely to leave you with a worse problem than you had in the first place.
If you choose to take out a secured loan, you need to be aware of the risks involved with regards to your assets. Your assets are offered as collateral in the case of a secured loan. If you default on payments, your house or your car could be repossessed for immediate repayment. Secured loans are a good option if you’re looking for a bigger loan and a lower interest rate, but the risk to your property should be carefully considered.
Some consolidation loans offer you lower monthly repayments over a long-term period. In this case, it is important that you work out how much interest you will pay over the full loan period. Sometimes the interest is a lot higher than you thought it would be, and the illusion of low monthly repayments will only ensure that you pay more in the long-run.
There are many creditable lending establishments that offer debt consolidation loans. However, there are debt consolidation scams in circulation. It is of the utmost importance that you carefully consider which lending establishment you will use to consolidate you debt. Do not fall prey to the dishonest practices of a few unethical businesses. Summary As is the case with any loan, a debt consolidation loan has risks attached. It is important that you weigh these up before you decide to consolidate your debt. |
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