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The flip side of Debt Consolidation

Debt consolidation is the taking out of a loan to pay off one or many others. Normally debt consolidation is done to attain a lower interest rate or a fixed one or even for the simple reason of servicing another loan. In these times of a global financial crisis, many people have found themselves in positions where they can’t pay off their loans and mortgages and debt consolidation as an option is a very attractive one.

While not denying the role of debt consolidation in solving many financial woes in many households, it also has a flip side which could rear its ugly head if one is less than careful or not fully informed about debt consolidation. Normally, debt consolidation will involve getting a secured loan to cover one or several other unsecured loans. This is because interest rates are significantly reduced if a loan is secured than if it otherwise wasn’t.

However, as mentioned earlier, debt consolidation might not turn out to be as rosy as most people think. In theory it is a very pragmatic decision but then life as never been that simple. Here are some of the flip sides of debt consolidation and what you can do to safeguard yourself from further misery.

1. While the monthly installments for the new loan might be lower, the total amount of money repaid through debt consolidation is very often much higher mainly because of the longer period taken to pay out the loan. It would appear a good deal to have your monthly installments reduced but in the long run, you stand to lose a lot more money through the very option that you thought was out to rescue you. You need to find out and thoroughly scrutinize the debt consolidation package offered to you before signing in for it.
2. Most financial and lender companies normally wait until you have your back against the wall before closing in on you and offering a loan as a debt consolidation package. This means that you will find their approach more than welcome and this leaves you with little chance of negotiating a good loan package. Since at this time all you will be thinking about is paying off your other due loans, you will be a little more than willing to accept whatever deal is offered. Do not wait until it’s that bad before considering a debt consolidation loan. Start early.
3. It has been discovered that most debt consolidation loans are simply just home equity loans well disguised. What normally happens is that the financial and lender companies use the equity built up on your home since it is the most probable asset you will offer as collateral to pay off all your unsecured debts. They then charge large fees for the services. So what you now have is a new secured loan with your home as collateral. If you fall behind in your payments you risk losing your house. Be on the watch out for that.

Always be careful in choosing your debt consolidation loan. It could be the beginning of your financial woes. Good luck.