Visit almost any financial site on the web, or watch nearly any daytime TV channel, and you're likely to see advertisements promising that a consolidation loan can solve all your debt problems. There's no doubt that consolidation can be an effective way out of financial difficulties, but there are very real dangers involved. Done badly, it can turn a poor situation into a disastrous one. If you want to enjoy the financial freedom that debt consolidation can bring, it's important to bear the following points in mind before committing yourself.
Can You Get a Low Enough Rate?
The basic idea behind debt consolidation is to rearrange your finances to make your monthly repayments more affordable, even if that means taking a lot longer to clear the debt. This relies mainly on obtaining a loan with a low enough interest rate to make it worthwhile. Unless taking out a new loan will significantly reduce your monthly expenses, it won't do anything to solve the underlying problem, even if it might temporarily stop the demands for repayment on your overdue accounts.
Are You Risking Your Home?
Wrapping up your unsecured debts into one bundle secured on property might be a quick way out of immediate difficulties, but if you get into trouble making your repayments, you risk losing your home to foreclosure. If debt consolidation is a response to a desperate situation, it might provide short-term relief, but only at the expense of delaying the problem with worse eventual consequences. Be sure you can fully afford your new loan before signing up, and don't rush into accepting a high-rate deal simply through desperation.
False Sense of Security
After paying off all your problem debts with your new loan, it can be tempting to see your situation as a clean slate. This isn't the case - you've not cleared any debt, just restructured it. If you then start to use your credit cards and other accounts to build up new debts, you'll likely end up in an even worse position than before. To avoid this, make sure you close your old, empty accounts, cut up your credit cards, and avoid all temptations to spend money that you can't afford to repay immediately.
In situations where debt is costing too much to be handled, consolidation can be an excellent tool for bringing your budget back under control. However, be sure to think carefully before heading down this path if you want to enjoy the benefits without risking disaster.