Watch Out For The Pitfalls of Debt Consolidation Loans
From what you see in various advertisements, it would appear that a debt consolidation loan would be the answer to many prayers. For whatever reason, you were living near the edge of your budget, and then something unexpected happened and your indebtedness house of cards started to fall. What could be easier than a debt consolidation loan to give you the breathing room you need to get back on the right financial track?
It seems simple enough ? get your big and medium sized loans paid off without a black mark on your credit report, and the result is that your monthly payments on the debt consolidation loan are actually lower than what you were paying before. And since you are only paying one source of interest, the total amount of interest you pay on that loan is much less also.
But does it really work that way?
The answer is both yes and no. The real answer depends on how you plan to handle the debt consolidation loan. As far as paying less interest overall, that may not be entirely true, because while you might have only had a year or two years on your original debts, your debt consolidation loan may be extended out to 3 or even 5 years, so the total amount of interest you will pay could be more.
A debt consolidation loan is usually an unsecured loan, which is why the interest rates are usually higher than a conventional personal loan. If you are willing to and can provide some type of secured collateral with your debt consolidation loan, you could find much more attractive interest rates. If you do not plan to pay the loan off early but just make the monthly payments each month, you may be further ahead to secure the loan via collateral, such as your house or a paid-off car.
The other danger about an unsecured debt consolation loan is the aspect of compounded interest, which is so sinister that it should almost become illegal. What happens is that when interest is added to a loan, the compounding of interest means that interest is charged on the total outstanding balance, which includes interest. So in other words, you are paying interest charges on interest! But the good news with this is that this only becomes a major problem if you start missing payments on your debt consolidation loan, which is where the interest penalties really start to kick in.
A debt consolidation loan can be a live saver, assuming it is the best financial option for you. It is certainly better than defaulting on a dozen or more credit cards and loan payments that you would otherwise default on. It allows you some financial breathing room to get yourself back together so you can start making payments on time, paying out less in total than you were before, and not getting negative marks on your credit report. And it is certainly better than filing for bankruptcy, since that will haunt you for the next 7 to 10 years as a huge red flag on your credit report.
Be aware of the advantages, the disadvantages, and the dangers of a debt consolidation loan before you sign on the dotted line. It may be the right option for you, but make sure you understand your obligations and don't get yourself into more financial trouble than what you started with.
For more insights and further information about Debt Consolidation Loans please visit our web site at http://www.debtconsolidationstrategies.com
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