27 Jun Is There A Debt Consolidation Downside?

Have you been thinking about getting a consolidation loan and wondering if there’s a downside? There are pros and cons to everything in life, including debt consolidation. It’s important to carefully weigh your options and decide if consolidating your debt is the right path for you, or if you should take an alternative route to becoming debt free.

Read on to discover the potential drawbacks of consolidation loans and how to avoid them.

Temptation to overspend

When you take out a consolidation loan, all of your credit card balances will drop to zero. This is not an invitation to spend more on your credit cards, however tempting it may be. We advise that you cancel your newest credit cards, keeping 1 or 2 old ones. This is because having a long credit history is important to your credit score. Also, the higher your credit limit and the lower your balances, the lower your credit utilisation ratio– great for building credit! If you would ever like to take out a mortgage or auto loan, it’s important that you still have some sort of standing with the bureaus.

Be sure that you have dealt with the initial issue that made you spend more than what you earned. Otherwise, a consolidation loan will act as an invitation to accrue more debt and add more stress to your life.

Higher interest over time

Although consolidation loans do have lower interest rates than revolving credit, the total amount of interest you pay over time might be more than you intended the longer you wait to pay off your balance. This is because the longer you take to pay off a balance, the more interest accumulates.

Note that lower monthly repayments could help you a lot in the present, especially by freeing up room in your budget. Being able to afford to eat is better than paying off debt and not eating. So what if it takes longer to pay off your debt? At least you have some financial breathing room.

Missing payments

Though a consolidation loan can boost your credit score when you pay off your balances on other accounts, missing payments on your consolidation loan can severely hurt your credit score– even more than missing payments on multiple debts.

Missing payments impact your credit utilisation ratio, one of the most heavily weighted aspects of your credit score calculations. This is because you have hindered the progress made toward paying down your total balance. What’s more, is that not all missed payments were created equally. Missing a payment on a large loan, like a consolidation loan, could be reported as a severe delinquency. That’s because payments are often reported more often, like every month end, on larger loans as opposed to smaller loans on other accounts.

Underlying issues unaddressed

Taking out a consolidation loan won’t just make your issues with credit go away. An unhealthy relationship will fester and wiggle its way into whatever steps you take to pay off your debt. If you have problems with overspending, an addiction to shopping, or are living over your means, it’s important to seek professional help from a financial advisor, psychologist, or trusted confidant.

If you would like to discuss the benefits and drawbacks a consolidation loan could have on your life, get in touch with one of our professionals. We would love to help you attain financial freedom.