Why Debt Consolidation Can Leave You Deeper in Debt

One of the biggest financial challenges that many of us deal with today is debt. It takes forms such as student loans, automobile loans, credit card debt, mortgages, bank overdraft charges, payday loans and more. When your debt is too much, it can become very difficult to pay it all back. However, there is a solution which you can use. A debt consolidation loan is a method which you can useto get rid of all your debt in one fell swoop. Here is more about it.

 

What is a debt consolidation loan?

 

This is a type of loan which you can apply for and use to pay off all your debts. It is a method of debt refinancing which pays off everything you owe and allows you to make one convenient payment every month instead of multiple payments. This type of loan is provided by debt consolidation agencies, banks and credit unions. There are many types of debt consolidation loans. They include:

 

  1. Home equity loans
  2.  Credit card balance transfers
  3.  Personal loans

 

You can use these types of loans to pay off all your debt and then remain with one loan to service. Moreover, after getting this loan, you can find yourself enjoying lower interest rates than the average of your previous debts combined.

 

Servicing only one loan also reduces the amount that you pay in late fees since there is little chance that you can miss the single payment. Despite its convenience and effectiveness, debt consolidation can leave you deeper in debt. Here is how.

 

Consolidating your debt covers up your real financial problem

 

Having multiple debts with high-interest rates and the inability to pay them all is a symptom of financial irresponsibility. Consolidating this debt and servicing it with one lump sum loan does not fix your problem. It only provides convenience but is still debt which you have to pay.

 

The main problem is your perspective on money and the things that you do with it. As such, instead of eliminating your problem, debt consolidation can end up providing you with a new loan which is symptom of your main financial problem.

 

It helps you to keep living beyond your means


Many people end up deep in debt because they are trying to keep up with the Joneses. They are living beyond their financial means. This means that they use credit cards to buy things that they do not need and end up deep in debt because of this habit.

 

Debt consolidation provided organizes all your outstanding debts into one manageable loan. It does not correct the mentality of having to keep up appearances. Therefore, the recipient of a debt consolidation loan can end up getting even more credit cards to support their habits. Doing so makes the effort of debt consolidation ineffective and results in going deeper into debt.

 

Debt consolidation does not get rid of your debt

 

While it organizes your debts into one payment and may provide a low-interest rate, debt consolidation does not actually eliminate what you owe. It is simply a financial instrument which you can use to organize your debt. Some people use this method to pay off their credit card debts and inform their friends and family that they finished paying off their credit cards. While this is true, they leave out the part where they are still making payments to one company every month. The multiple debts are paid off but you still owe money to a creditor. As such, debt consolidation does not get rid of your debt; it only organizes it better.

 

An unsecured loan may still be expensive to service

 

Debt consolidation normally involves getting a loan whose proceeds you can utilize to pay off all your multiple outstanding debts. After that, you can make only one payment every month. There are two main types of this loan; secured and unsecured.

 

A secured debt consolidation loan involves collateral such as your home or any other property that you have. The debt consolidation loan provider uses this security as assurance that you will pay back what you owe. An unsecured debt consolidation loan is where you receive money with no collateral involved. This one is based purely on trust and financial obligation.

 

Seeing as there is higher risk in an unsecured debt consolidation loan, the interest and monthly payments are likely to be higher. Therefore, it can still be quite expensive to make monthly payments. You may even find yourself unable to make the payments required to service your debt consolidation loan.

 

Conclusion

 

Debt consolidation organizes your debt from multiple debts into one manageable one. It allows you to make one payment per month instead of many. Despite its ability to do so, it can actually leave you deeper in debt. That is because it fixes the symptoms of your financial irresponsibility but does not fix your main problem.

 

 

 

 

 

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