Debt Consolidation Loans: The Tricks & Traps

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Many borrowers see debt consolidation loans as a magic formula that would solve all their debt problems. The debt consolidation loans work by bringing together all of your several bills into one, at a lower monthly payment rate.

There are many advantages and disadvantages of availing debt consolidation loans. There are many disadvantages that may cause you to think twice before availing any debt consolidation loans. The first and the foremost thing is that when you consolidate all your debts into one with lower interest rates, you get to save a lot. How this saving can tempt you to spend more has to be seen by you.

When you start spending more, after availing debt consolidation loans, you add on more debt to your account. You would not get another debt consolidation loan to pay off the greater debt that you must have mounted up. The debt consolidation loans are capable of turning out far pricier than the amount of the debt they are packaged to pay off. Many debt consolidation loans can have hidden fees, high rates of insurance, and other profitable tools that may be good for the lenders.

There are just two types of loans, which are typically considered to be debt consolidation loans: home-equity lending, which allows the consumers to take the loan against the value of their homes, and personal lending, which is usually not supported by a home, a property, or some other collateral. Personal lending is based on the borrower’s promise to repay.

Personal loans have interest rates of approximately 14% to 15% for the people who have good credit. Those who are in huge debts or have a problem credit are usually expected to pay more. The interest rates for people with bad credit can go up to 18% to 21% and above. The borrowers can also be asked for upfront fees that could come up to be about 10 percent of the total loan amount. If the borrowers can get a low-rate loan and pay off their debt faster, only then do debt consolidation loans make sense. It makes sense when a person takes a debt consolidation loan to make his/her payments at lower interest rates, than what he/she was supposed to pay earlier.

Most of the times, the consumers look for lower monthly payments, and of course lower costs. Lower monthly payments mean that it would take much longer for you to pay off your entire debt. This will inflate the amount that you are ultimately supposed to pay. Many people complicate their debt problems by running up their credit balances even after they have consolidated their older debt, by debt consolidation loans. This is absurd, as people actually end up adding more to the debt that they already have and bring themselves closer to bankruptcy or a financial breakdown.

Many companies that deal in debt consolidation loans force very expensive add-ons. These add-ons can increase the amount that you owe by a very high percentage. Single premium credit insurance is one of the most popular ways the lenders use to increase their profit on the debt consolidation loans. The insurance is designed to cover the payments of your loan in case you become sick, die, or get unemployed. This insurance adds about $1,500 to $2,000 to the balance on a $5,000 loan that you could have taken. The insurance cost has to be paid right in the beginning; therefore, you end up paying an extra amount on the debt consolidation loans every month.

Debt consolidation loans are capable of damaging your credit to a great extent. Several factors of these loans, like applying for a new line of credit and closing up of older accounts, can harm your FICO score in a big way. The benefits of debt consolidation loans might overpower the good points about them; so, you should weigh the pros and cons of the loans before taking them.