Are There Risks To Debt Consolidation?

A substantial number of people nowadays get themselves into such debt that they sometimes have to accrue further debt in order to pay it.This fighting-fire-with-fire approach, if misunderstood or misused, can lead to further debt problems instead of helping to solve them.It can be potentially as deadly to your finances as the Mann Gulch fire was to the hapless smokejumpers whose task it was to try and control it.What is Debt Consolidation?In a nutshell, debt consolidation is a way of refinancing a loan. It involves a person either taking out a single loan (secured or unsecured, depending on the package offered) and using the payments to pay it instead of their numerous other loans, or debt can be consolidated by merging credit card accounts into one account.For the former, the payments are then used by the finance company to pay back the other loans, and in effect, the person’s other debts come under the aegis of this debt consolidation loan.What debts are eligible to be included depends on the debt consolidation package being offered and the ability of either the debt consolidation company and/or the debtor to renegotiate their loan terms.AdvantagesDebt consolidation offers several advantages. For one thing, it’s often easier to make a single payment than trying to remember what to pay off when. Some people are just not that good at remembering and scheduling payments.The convenience offered by a debt consolidation loan can also offer peace of mind to a person. The debtor can also avail of the advantages of paying off a lower interest rate presented by one single loan, instead of having to pay off the interest of many loans.In some cases, the debtor can also prepay their creditors through the debt consolidation loan.PitfallsNaturally, undergoing debt consolidation entails its own set of risks. One is that one’s credit rating takes a hit when one undergoes debt consolidation. It is taking out another loan, after all, and essentially zeroing out any progress the person has made paying off the other debts.Another is that debt consolidation loans might not offer interest rate advantages over individual loans, because people who have been paying off their loans for a long time can often renegotiate their terms with their creditor, and these might be lower than the interest rate offered by the debt consolidation company’s loan.Still another is that the refinancing plan can fail if the person doesn’t make some changes to curb his or her spending and save more money.Debt consolidation is a drastic step to take, a fact some people don’t seem to understand. Some see their credit card balance or their loan read “$0” and take it as carte blanche to keep right on spending and spending.In this situation, the new loan can act merely as a sticking-plaster on a serious wound, halting problems temporarily but doing nothing to remedy the underlying situation.If the person who took out the debt consolidation loan should then be unable to repay it for example, they need the money due to a family emergency and they would find themselves in more trouble than they were at the start.