Personal debt consolidation is a method of combining all debts into a single payment. Methods for debt consolidation include taking out a personal or home equity loan to pay off credit cards and other loans. Several companies, including banks, offer debt consolidation loans. Consolidating debt can be beneficial if a home equity loan is used since the interest can qualify as a tax deduction. However, there are many pitfalls to personal debt consolidation.
Overspending
Debt is sometimes the result of personal overspending habits. Overspending is the result of habitually spending more money than one has, and using credit to pay the overage. Wide availability of credit made overspending easy for many Americans in the early part of the 21st century. Debt consolidation will lower the monthly payment of overall debt, freeing more available monthly income for other purchases. If a borrower does not harness her spending habits following consolidation efforts, she may find herself in greater debt than before the consolidation.
Hidden Fees and Extra Costs
Consolidation loans can be expensive. The loans will have origination fees and other hidden fees that increase the cost of the debt. Some loans require an expensive loan insurance to protect against bankruptcy losses. Consolidation loans may also have a high interest rate that can increase the overall price of the debt.
You'll Pay More In The Long Run
Consolidation loans may lower your monthly payments, but the borrower will end up paying more than he currently owes by the time the loan is repaid. Lower monthly payments are made possible by consolidation loans by stretching the length of time to payback. The additional months of low monthly payments include additional compound interest rates that the borrower would not have paid if she had made the payments on original debt.
Negative Credit Score
Closing accounts and opening consolidation loan accounts can cause FICO scores to decrease. The FICO score measures debt-to-income ratios. By closing current credit accounts and opening up a single line of credit for the consolidation loan, borrowers reduce the amount of credit available to them, which hurts their score.
Collateral Damage
Some consolidation loans require personal collateral for security. If, for any reason, the borrower is unable to make payments on a consolidation loan, and even puts a car or home up for collateral, the bank or loan company can legally seize the home or car. Cars and homes are the only assets some Americans possess. Losing these can leave the borrower with nowhere to live and no way to get to work.
0 comments:
Post a Comment