Why consolidation might not be as effective a solution as you think?

Many borrowers experience struggle with multiple debts. The risk of falling into an abyss of debt is enormous when the due dates slip through the cracks. To avoid bearing adverse consequences of defaults or missed payments, many borrowers feel inclined to combine all their outstanding debt into one large personal loan, which enables them to make one monthly payment. It is not always as simple as you expect it to be. In fact, it could potentially push you over the edge of the debt.

Debt consolidation is considered to be an effective solution to combat insurmountable debt, which involves bringing all your debts into one place. It consists in taking out a personal loan equivalent to the amount of your existing debts, so you have to make one fixed payment every month rather than on different dates. Combining all unpaid accounts appeals to many borrowers because of the prospect of manageable payments.

But there is a lot more to it than meets the eye. Not all types of outstanding debts can be merged into a personal loan. For instance, credit card bills never come under consolidation. If you have multiple cards, you are supposed to handle them separately or seek a 0% balance transfer. Consolidating your existing debts is not a cinch. You must have a good credit rating. Though some lenders are out there to approbate debt consolidation loans for bad credit, they will charge very high interest rates. You will most likely fall into a debt cycle.

Hidden dangers related to consolidation loans

Many people attempt to combine their outstanding debts in the hope that they will get out of debt, but they find themselves deeper into a debt hole. Here is what some real borrowers have revealed about consolidation loans:

“I combined unpaid dues worth £10,000 two years ago and promised myself that I would not end up borrowing more money, but to my nasty shock, I did, and now I owe more than that, still waiting to get rid of debt.”

“What I feel about these loans is that they are not solving your debt problems. They would rather postpone the payments. I thought of them as a relatively inexpensive alternative, but they cost me too much money. Despite a good credit score, they are far from being affordable. “

Consolidation is the replacing of multiple debts with a single large debt

Consolidation loans have been designed to help you combine all your unpaid accounts into one large loan. They do not intend to alleviate the amount of the total borrowed amount. They, in fact, release you from obligations towards multiple debts. When it becomes challenging for you to tackle payments of multiple debts, you could consider merging all of them into one large loan.

With the help of a personal loan, you will have to make payments for fixed instalments over an extended period of time. If you compare the total cost of the personal loan, you will discover that they cost you much more money in total.

This is because interest rates for personal loans are usually higher as your lender cannot repossess your assets to cover their money back in case of a default. While personal loans are not as expensive as payday loans, the accrued interest amount over a period of time will cause you to pay more than you had to otherwise.

So, do not be under the impression that combining your debts into one large personal loan will help you save money in interest payments. In addition to interest, you will be obligated to pay some fees and charges, which increase the cost of the debt. You should always try to compare the consolidation loan with unsettled accounts. You will not benefit from a personal loan if it costs you more than the cost of debts paid off separately.

Consolidation does not stop you from borrowing

One of the biggest challenges with personal loans is that people assume they will not need to borrow money until the settlement of their debt. Debt consolidation is considered an effective solution because of manageable payments. You know how much debt you owe and how much you have to pay every month.

Unfortunately, things seem to be overly simplistic. Addressing the reason for borrowing money is vital to preclude yourself from falling into debt. A personal loan will only help you manage payments. It does not diminish the size of the debt. But if you do not address your debt problems in the first place that kept you borrowing, you will end up with a large amount of money.

Experts suggest that you should combine all your existing debts only when you are completely confident about your repaying capacity. Borrowing more money for whatever reason is not appreciated.

In order to get rid of debt, you might choose to opt for a bigger monthly instalment and compromise with your savings, but this will push you on the verge of debt.

Combining your unpaid debts will have long-term implications on your credit report

Chances are you will qualify for a personal loan at affordable interest rates and manage to stick to your payment plan without borrowing more money throughout the term. Yet, they will have a damaging impact on your future borrowing capacity. They will be reflected on your credit report.

In case you would want to borrow money down the line, they will raise doubts about your affordability and credibility. Consolidation is considered a red flag as it clearly insinuates that you have been struggling to repay the debt. Lenders might be indisposed to lend you a large sum of money. They will prefer to sign off on a small sum of money and charge high interest rates. Consolidation continues to reflect on your credit report for up to 10 years. It is worth noting that these loans will reduce your prospects of borrowing money in the future, albeit on-time payments. Make sure you have carefully understood the impact of using a personal loan to settle your outstanding accounts.

Consolidation loans are not always a bad choice

If you are juggling multiple debt payments and suspect that you might fall behind on payments, you should consider merging them into one large personal loan, provided you are completely sure about your repaying capacity.

Personal loans could cost you a shade more than the current unsettled debts, so make sure you will not struggle with payments. Further, address the reason for falling into the trap of borrowing. There is no need to choose this alternative if you do not overcome the cause of being thrown into a debt cycle.

Ideally, you should use them as a last resort. The first priority should be dealing with multiple debts individually, especially if you have an assortment of debts such as quick loans, payday loans, bad credit loans and instalment loans.

The bottom line

Consolidation may not be an effective solution if you keep borrowing money. It is always enjoined that you address the cause of borrowing; otherwise, you will never be able to get out of debt. Compare the cost of a personal loan so you do not end up paying more than you have to on your current outstanding debts.