Taking out a loan is something many people and businesses do in order to purchase high cost items. As long as you can justify to a lending institution that you are eligible to pay the loan and its interests, you can get a loan to help put up a business, purchase a car or buy a house. More often than not individuals or businesses have several loans to pay off. But there are times when misfortune comes our way and paying the loan is not as easy as it used to be, as a result,the loan just keeps getting bigger due to late penalties and high interest rates. There are those who use a debt consolidation solution to help manage this type of financial mishap. Nonetheless, a debt consolidation solution is not one without cons, it can be a quick escape from a sticky situation but it has possible disadvantages that must be considered before making the decision.
1. First and foremost, a debt consolidation solution has higher interest costs. The low interest rates can make a debtor think that he will be paying less, wrong, because the terms of a debt consolidation lasts much longer. The lower interest costs are nullified by the length of the term. Incurring a bigger debt is definitely not a good thing unless you have no other option left.
2. There is a risk of losing your home if the debt is not paid. If you included your home in a debt consolidation solution as collateral, you can lose your home if things don’t pan out the way you planned it to. Why do people collateralize their home then if there is a possibility to lose it? If a home is used as collateral, the debtor gets lower interest rates in exchange. The collateral gives the lender much lower risk which therefore allows the lower interest rate.
3. There is a tendency to feel that you have less outstanding debt. Since the consolidated debt requires a lower monthly payment, there is a tendency to spend a lot again because of the extra cash you have. In addition, your credit cards will again have zero balance, which can tempt you into swiping again.
If you want to try a debt consolidation solution, it would be best to get advise from financial advisers.