When is Debt Consolidation Not a Wise Decision?
Loan Fees, Budget Control, High Interest, Home Equity to Consolidate
Aug 18, 2009
Can financial "help tactics" actually hurt? Learn how debt consolidation can essentially do more harm than good if an individual is financially misguided or lacks economic responsibility.
Debt Consolidation Loan Fees
One of the initial pitfalls of debt consolidation comes in the form of the actual payment. Many people come to the conclusion that consolidation is perfect for his or her financial standing, but then fail to realize the actual loan becomes a problem. This is where the "help/hurt" factor comes into play.
The individual has been granted an easier and more structured payment plan, but the actual payment cannot be met. The consequences of failing to maintain payment obligations of a debt consolidation loan can be catastrophic. Loans of this nature are secured against the individual’s home, and if the consumer fails to meet required payment demands, the residence could be lost.
It's vital to make sure an individual knows well in advance if he or she has the financial means to proceed in the debt consolidation process.
Lack of Budget Control
If an individual has a history of being financially reckless, debt consolidation is not recommended. Individuals need to understand the consolidation process will reduce overall monthly payments, but the actual debt will not decrease. If the financial assistance is used wisely and properly, debt can most certainly decrease, however, it's not a built-in guarantee.
Individuals who seek financial help of this nature may be lulled into a false sense of security and thus encounter more debt. Just because a person is currently seeking professional financial assistance doesn't mean his or her economic situation is "solved" or on solid ground.
If a consumer continues to be reckless with spending habits, additional problems can occur during the actual debt consolidation process. Even a person who is under the "care" of a financial professional can still encounter more monetary difficulties. Financial issues of this nature will never be resolved especially when the problem…is the individual.
High Interest
Lower rates don’t mean lower interest. If an individual doesn't wish to pay high interest in the long term, consolidation may not be the proper financial option. Individuals who fully understand the process and know what to expect and have made financial provisions are "in the clear" in many cases.
However, before an individual makes a hasty decision he or she would be well informed to look at the entire financial picture and make necessary provisions or avoid this monetary option entirely.
Home Equity to Consolidate
Homeowners who need home equity in the future are advised to avoid debt consolidation. If a homeowner plans to make changes to the home, use home equity for emergencies, or even use money for extra retirement funds, the homeowner is advised to decline the consolidation procedure.
When an individual uses home equity to consolidate, the person has drastically decreased funds and resources for the future.
Source
Bills.com
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