Debt Consolidation Risks

19 Aug 2007 Tell a Friend

Consumer debt is a big problem for many UK residents, and many resort to taking out a consolidation loan to reduce or eliminate their debt burdens. However, is a consolidation loan the right option for getting rid of consumer debt, and what are the potential pitfalls?

Risks Inherent to a consolidation loan

  • People with a bad credit can expect higher interest rates on their consolidation loans because lenders will see them as a greater risk. Monthly savings may be quite small compared to if they had paid off individual loans and debts independently.
  • A debt-ridden individual might hire the first debt consolidation company that they find. This is one of the biggest dangers of a consolidation loan because those are often quite desperate because the due dates for their different loans are creeping up on them. However, debt consolidation counsellors and debt consolidation companies come in all different varieties and levels of reputability, so be sure you know what you are getting into before you agree to anything.
  • People who have incurred a sizable number of debts should know how to identify what caused them to get into trouble in the first place. Even if you succeed in paying off your debt consolidation loan, you might still get into debt again afterwards if you don't attend to the root of the problem. Common causes could be lack of self-discipline when it comes to paying debts or a habit of taking out loans to finance impulse buying. A debt consolidation loan is not a cure-all, and it certainly cannot correct such bad habits.
  • Not all debts are covered by every consolidation loan out there. You will have to ask carefully if each one of your lenders can be paid through the consolidation loan you choose. Some common forms of debt that are usually covered by consolidation loans are bounced checks, student loans, personal loans, department store cards, medical bills, and credit card debt.
  • You might be forced to pay a hefty commission charge to the consolidation loan company, so be aware of any such charges and fees before you sign for the loan.
  • By taking out a debt consolidation loan, you may be doing more harm than good to your credit rating, if you are not careful.  Always commit to making your loan payments in full and on time each month.  If this is likely to cause issues for you, an alternative debt solution may be preferable.