Debt Consolidation Loan Consequences
If you owe $15,000 spread out among four credit cards and a car loan, and they are set at high interest rates, you might want to consider a debt consolidation loan. A debt consolidation loan pays off those high interest loans and combines them into one low interest rate, usually lower payment loan. The positive consequences to this are:
- It simplifies your money management. Combining all of the loans reduces the amount of payments you have to make from several to one. With one line item, you can possibly begin a sound money management approach for all of your finances.
- It comes with a lower interest rate. This can make an incredible difference in the amount you have to pay off. For example, if you had $10,000 in debt at an average rate of 29.99%, you would spend over $34,000 and take 31 years to pay it off. With an 8.99% debt consolidation loan interest rate, you would spend just over $12,000 and take only five years to pay it off.
- Less Financial and Mental Stress. Having a lot of debt can create stress in your life. Getting high interest rate credit cards under control can help reduce that stress.
There are also negative consequences to obtaining a debt consolidation loan. If not heeded, they can keep you in the equivalent of a financial treadmill for years to come:
- Overspending: One of the real possibilities after you obtain a debt consolidation loan is to keep spending. The credit cards you pay off will not be cancelled. But they will be at a zero balance. Now you have all of this available credit you might not have had before. It might be tempting to run those credit cards back up.
- Default Risk: If you use your home or other asset as collateral for the loan and you default on the loan, you could lose your home.
- Unethical Lenders: There are some lenders who take advantage of borrowers by raising rates or tacking on hidden charges and extra fees. This could result in you paying more than if you had stayed with the multiple bills. So, be careful of this when selecting a lender.
As is usually the case, you can get the best interest rate going with a solid lender but ultimately, managing your debt consolidation loan is entirely up to you. Used wisely, it can be a wise financial decision.