You’re drowning in debt and struggling to find a way out – but it seems like every day brings a new debt consolidation offer to your doorstep.
A new loan can help you lower the interest rate you’re paying across the whole of your debts and roll all the bills together into one (much more manageable) payment each month. However, that doesn’t necessarily mean it’s the right option for you.
Here are some problems you may encounter
Debt consolidation is not without its drawbacks. Overall, it can be a useful tool, but you have to consider the following:
- The high cost of fees: Check those interest rates carefully. If your credit is already damaged, you may not qualify for the best interest rates, so consolidating the debt you have may not actually lower your costs. With balance transfer and loan origination fees, you could end up owing even more.
- Extended repayment periods: You could end up with a lower monthly payment for a much longer time. The amount you end up payin gin interest over the life of the loan could be significantly more than what you expect.
- Risks to your collateral: Many of your debts may be unsecured debts, like credit cards and personal loans. A debt consolidation loan may have to be secured against your home or vehicle, which means you could lose those to foreclosure or repossession if you ever fail to pay.
- A false sense of security: You have to be disciplined about your debt to make a consolidation loan work. If you pay off your credit cards with one and then give into temptation and spend too much, you could get into even deeper financial trouble.
Some debt consolidation loans can be outright predatory, especially when they’re marketed to those in financial distress. If you have doubts about your ability to repay your debts, it may be better to discuss all of your legal options for relief before you make any hard decisions.