Are you considering a debt consolidation loan? Millions of Americans have used this method to combine all their outstanding debt into a single loan. Doing so typically helps to lower monthly interest expenses. Most debt consolidation loans, with their single monthly payment and longer repayment period, are easier for borrowers to manage, too. Dealing with one debt payment, rather than multiple different ones, can make the problem of tackling debt less overwhelming for many.
However, debt consolidation loans are not for everyone. Some borrowers may not be eligible for these types of loans due to a myriad of reasons including insufficient credit.
One of the biggest problems with unsecured debt consolidation loans is that borrowers, who are already heavily in debt, may be deemed bad credit risks. Lenders may be unwilling to provide a debt consolidation loan if you’ve maxed out all credit cards, especially if you’re having trouble making minimum payments.
Borrowers with a major asset to pledge as collateral, such as a home or other real property, may have a better chance of obtaining a debt consolidation loan. However, if you’re facing challenges each month just making ends meet, even that might not be enough. So, if a debt consolidation loan is out of your reach, be prepared to pursue other options to pay off your debts.
For others, actually securing a debt consolidation loan could make their financial situation worse. Even you are eligible for a debt consolidation loan, it still may not be the right choice to reduce high levels of personal debt. Let’s look at three reasons to avoid a debt consolidation loan and help you make the best choice for your finances.
1. You’ll Have Higher interest rates
Even if you can qualify for a debt consolidation loan, you may have to contend with a high interest rate. Lenders tend to set their interest rates based on the amount of risk involved in the loan. Therefore, if you have a low credit score, or are otherwise considered a higher credit risk, you’ll likely pay a much higher interest rate on any debt consolidation loan.
If the interest on the new loan is too high, it’ll take you much longer to pay off the overall debt. A higher rate will also raise your monthly payment as well and may make it even tougher to pay off your debts while still managing your budget. Again, if your credit is suffering, it might be better to consider other options.
2. You Might Miss Other Opportunities
If you opt to obtain a debt consolidation loan, and you actually qualify for a decent one, you’ll likely have a longer repayment period and a lower interest rate on all your outstanding debt. This will make it easier to manage your overall budget, and simpler to track the debt. However, it’ll likely take you much longer to pay off your debt than if you chose to pursue other options, and you may have some lost opportunities because of it.
A large amount of outstanding debt will keep your credit over-extended for a longer period. This will make it difficult to obtain additional credit for other important life purchases, such as buying a house. It may also make it more challenging to improve your credit score, which could further affect your access to credit. It could also affect potential job opportunities as well. Look ahead a bit before agreeing to a debt consolidation and determine if you’re undermining future opportunities.
3. You’re not sure about your money management skills
How’d you get into debt in the first place? If you don’t know the answer to that question, debt consolidation probably won’t help you solve your problem. You may even get into more debt after you consolidate your current debts. Many people fail to budget their money effectively and rely heavily on debt to get them through each month. In this case, learning more about financial responsibility could be useful.
However, if you’re in debt due to some type of hardship, it’s important to recognize that as well. While a situation like that can occur at any time, it probably won’t happen again in the near future.
If you haven’t identified the reasons you got in debt in the first place, consolidating your debts likely won’t fix your problems. If you’re in this position, consider other options before you take out a debt consolidation loan.
Consider all your options
While debt consolidation loans are commonly used to address high levels of consumer debt, they are not for everyone. Before you choose a course of action for dealing with personal debt, be sure to consider all your options. You may not even qualify for a debt consolidation loan and, even if you do qualify, it may not be the best way to address your outstanding debt right now. Analyze your situation and seek expert advice to find the debt reduction option that’ll work best for you.
