The Pitfalls of Debt Consolidation

Whether its debt from credit cards, a school loan, a car or home payment or all of the above, many of us find ourselves overwhelmed with personal debt.

Making the minimum monthly payment is only good enough to keep our heads above water. That’s why many of us seek a way to consolidate that debt into one lower payment.

Debt consolidation comes with its own risks, but you can minimize those by recognizing a few truths before moving forward:

Less Is More

A consolidation loan will often come with extended repayment terms, which means you’ll be in debt longer and shell out more money over the long run. Do the math and compare your total outlay to make sure the lower monthly payment is worth it.   

You Have to Pay Attention

A popular tool for consolidating our debt is a low-interest credit card. This method works–however, those lower rates often have an expiration date.

Keep track of those dates and move your balance to another card as needed. Otherwise, you’ll end up with a sky-high interest rate and accrued interest that can set you back further than where you were to begin with. The same goes for monitoring an adjustable loan, in which rates are subject to increases.

You Have to Save

Scoring a lower payment from debt consolidation gives you the perfect opportunity to use your extra money to your advantage. Pay extra to the consolidation loan, save for an emergency fund, or build your net worth by investing in the stock market or another asset. Don’t spend that extra money on needless items. 

Discipline Is Key

The good feeling that comes along with consolidating your debt is a great thing, but it can also result in a false sense of security that leads to running up new debt. Financial emergencies can happen at any time, so remaining disciplined is imperative.

There Are Risks

If you use an equity line of credit to pay off your loans and consolidate into one lower payment, you are putting your home at risk should you default. If you have the discipline to not run up new debt, this may be a sound option for you.

However, having overwhelming debt is bad enough. Having that debt and losing your home, too, is tragic.

Consolidating debt is an excellent way to streamline expenses, reduce stress and improve your credit. But along with these positive outcomes come the potential for negative consequences.

Knowing the truth about debt consolidation and educating yourself about potential pitfalls can help you avoid finding yourself in the same situation again down the road.