The Dangers and Drawbacks of Debt Consolidation
Too much debt to handle? If your monthly debt payments are making it hard to make ends meet, you may be considering consolidating your debts.
There are quite a few benefits to debt consolidation (though they change a bit depending on which method you use). Ideally, you should only consolidate your debt if it saves you money, simplifies your budget, and helps you meet your financial goals.
There are drawbacks to consolidating your debts, however, which you should consider before taking the plunge. Again, different consolidation methods have different features, so be sure to familiarize yourself with the pros and cons of the option you’ve chosen. These are the more general dangers of using any form of debt consolidation.
Drawbacks of Debt Consolidation
One Big Payment
In any form of consolidation, many debts come together in one, single payment. Theoretically, this new payment should (hopefully) be less than the combined payments, making repayment easier.
But what if funds are tight? Consolidation may cost you a little flexibility in how you deal with a shortfall. That may be a minor concern in the grand scheme, but it’s important to make sure your new payment fits comfortably in your budget.
Consolidation Won’t Fix Bad Financial Habits
Debt consolidation can make your day-to-day budgeting easier by freeing up some cash and accelerating your debt repayment. But that’s really only if your debt is static.
If your debt problems stem from unhealthy spending habits, then consolidating your debts is really only a bandage and won’t help you in the long run. In fact, it might make things worse if you feel like you can “afford” to keep spending money now that you’re consolidated your debt.
Don’t forget to address the reasons for your debt first, before committing to any form of debt repayment plan. Otherwise, you may find yourself in a painful cycle of rising debt.
You May Be Limiting Your Future Options
Taking an unsecured credit card debt and rolling it into your mortgage is a potentially advantageous way to save money by consolidating debt. The trouble, however, is that credit card debt and mortgage debt are very different, as are the consequences of defaulting on each.
When you consolidate your debts, you run the risk of losing out on certain options and programs. Consolidating Federal student loans into private loans could potentially cause you to miss out on applicable repayment programs. Turning unsecured debt into secured debt could make it difficult to file for bankruptcy, should you attempt to liquidate your debts.
You Need to be Committed
Debt consolidation isn’t a quick fix. Whichever method you choose, you need to be committed to seeing things through to the end and paying your debts off. If you’re using debt consolidation as a temporary measure to make things easier, it might work for a while, but eventually you may find yourself in a worse place than where you started. Only consolidate your debts if you’re committed to a long-term plan to become debt-free.