For some people, debt consolidation can help reduce financial stress because they no longer have to keep track of different debt sources accumulating around them. However, most people fail to realize that the debt still exists. It has simply been moved from one location to another and the debt holder is still liable for repayment. Prior to making any decisions regarding consolidation, it is necessary to thoroughly understand its implications.
Where to Start with Debt Consolidation
When consolidating, several loans are combined to create a single balance that requires only one monthly payment. The expectation is that interest will also be lower, allowing the debtor to satisfy his or obligation more quickly.
Debt consolidation loans can either be secured or unsecured. Secured loans indicate that property or other assets can be used as leverage for repayment. Conversely, unsecured loans do not require such collateral. Because there is greater risk involved to the lender in these cases, unsecured loans usually carry higher interest rates.
It is critical to remember that debt does not disappear during consolidation – it is simply reassigned. Therefore, it can have significant impacts:
- Consolidating via a secured loan means if there is an inability to pay, assets are at risk. This may mean the potential for repossession of vehicles, collection of retirement funds, or property foreclosure. Also, the terms of secured loans may be longer than the smaller ones they consolidate, meaning that expectations of interest are ultimately higher.
- Many individuals hoping to consolidate via unsecured loans have trouble doing so precisely because of their debt. If they are able to obtain such loans, they are likely to face exorbitant interest rates. Therefore, there is little benefit in terms of debt reduction.
Having one monthly payment as a result of consolidation may lead to some emotional and financial relief, but it may also stimulate premature confidence in the possibility of economic stability. Consolidators are encouraged to proceed with caution. Otherwise, the cycle of debt may amplify.