Disadvantages of Consolidation Loans

The basic proposal of consolidation loans is combining several higher interest debts in one lower interest debt. Because of low interest one may save up money for basic needs and keep cash for bad times or use that amount to pay off the amount of principal loan.

But there is always a catch, to gain something you always have to take the risk. Consolidation loans, is like digging a big hole to put in the dirt of other tiny holes dug earlier. It only has placebo effect on the person burdened by deadlines and interest on different loans. It mentally relaxes you that you are not answering and addressing to different lenders every month.

One of biggest disadvantage of consolidating loans is finding fair interest rates without hidden fees, if not handled properly and can only make the financial situation worst. Those offering consolidation loans don’t provide proper information on interest till application form is filled, thus leaving little room for comparing the market. A consolidation loan may lead you to pay more in total debt payment even though it has lower interest rate than your existing debts. At a surface, it may seem like you are paying less with smaller month payment and lower interest. But, if you add up the total payments that use to clear the debt, you will find that you are paying much more than if you paid the debts with consolidation.

Consolidation loan is not for everyone, but the companies are full of scam thus if not taken proper guideline and counseling one might end up in a very tough financial situation. With consolidation loans you may be required to give some form of security/collateral e.g. your home, car etc.           If due to some reason one loses the job or misses a payment you put your valuable asset e.g. home at risk by missing one payment.

With consolidating loans one ends up owing debts for longer time, thus straining your budget for longer time period and annoying you psychologically. If you had difficulty making your payments on several small loans, you may end up trouble paying one large loan. The biggest disadvantage of consolidation loans occurs when you do not address the problem that brought you into debts/loans at first place. People take out consolidation loan to pay off credit cards and end up using them again, thus making it difficult to manage debts. The debt world is full of unscrupulous people. You may well end up with a loan that has a high interest rate costing you more in the long run. Other debt consolidation businesses may pocket your monthly payments for the first few months leaving your creditors unpaid.

Consolidation loan doesn’t always work as intended. If you get involved with a small lender who goes out of business or passes your loan along to a less than fussy third party, you could find yourself in legal and financial serious trouble. Consolidation loans often can be very risky and nay be a bad idea to take up especially if you are struggling with your debts.

To pay your debts one needs to change the habits, ways of living and how you handle your money. To pay off loans you need to plan, make budget and save. Consolidation loans do not help in saving, planning or budgeting, thus leaving the cancerous cells that caused the disease is still there. Consolidation loans just ease the pain for the time being and hits you hard if not handled seriously and properly.

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