Debt Consolidation and its Adverse Effects

Debt consolidation is a method that would enable those who possess multiple debts to consolidate all their debts into a single one. This is mainly to make the loan repayment process much easy for the person who has multiple debts. And also debt consolidation loan would be framed in such a way that, the resulting consolidated loan would have lower interest rate charges. The charges associated with the consolidated loan would be calculated based on the terms of all the older debts that were consolidated.

Debt consolidation also comes under the secured loan category and thus the person has to place his or her asset as collateral in order to perform debt consolidation. Usually, the asset placed for debt consolidation would be a home of the borrower. This is to ensure that the lender has something to account for if the person defaults. I.e. if the borrower defaults the loan payment, the property placed as collateral can be sold by the bad credit lender in order to obtain the loan amount.

Downsides

  • Debt consolidation is an option that would help the person, manage all of his or her debts in a better manner, but the major downside of it is that, it does not teach the borrower about improving the personal financial situation or managing the finances in a better manner. Because, if the person had managed his or her personal finances, he or she would not end up having multiple debts and the chances of opting for a debt consolidation would be less.
  • Debt consolidation loans would also require the presence of collateral. The borrower would end up placing his or her property on the line for the loan. This is a risk for the person, because they might lose their property if they fail to repay the loans amount. Lenders would not accept any reasons for the repayment failure and they would be strict in handling these issues. Lenders would sell the property and obtain the loan balance as per the loan agreement. Any remaining cash left after settling the loan would be provided to the borrower.
  • Benefits of debt consolidation would be based on the personal financial status of the borrower. Thus, the person has to examine the benefits that they would receive personally before going for debt consolidation loan.
  • Comparing all the older debts with the new debt consolidation loan would show whether debt consolidation would be beneficial to the person or not. If the interest rate charged on the new consolidated loan is not lesser than the interest rate charged on all the older debts, then there is no use in opting for a debt consolidation.
  • Debt consolidation loan is a long term loan program and the person should understand the fact that, debt consolidation would only lower the monthly interest payments and it would not bring down the loan term period. For those who possess a good credit score and good financial status need not go for debt consolidation, since they would be able to manage their debts in a better manner and this type of borrowers should focus on closing down debts.

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