Disadvantages of Debt Consolidation

While there are many advantages to debt consolidation, there are a few concerns one must be aware of before approaching a debt consolidation company. There are a profound number of scams and 'non-profit' credit counseling companies which are actually only for-profit companies.

These kinds of companies do not have your best interests at heart, and you may be worse off than before you approached the company. Sometimes the benefits which are provided by a credit counseling company are actually benefits you can get yourself from your creditor if you just ask. For example: with a student loan, on some schedules after a certain number of on-time payments your interest rate is lowered a little bit. If you go with a debt management program or consolidate your student loans with a bank or other lender, you start over with the time period, so it can actually take longer for your interest rate to go down.

A disadvantage to debt consolidation through a second mortgage or a bank loan is that this is usually a secured loan. Failure to pay this kind of bill could result in you losing your home! In addition, you are still in debt, and usually with the same amount or only a slightly lower amount.

Many people respond to this form of debt consolidation as if they suddenly have no more debt, and go out and charge up their credit cards again! Thus, it is easy for a person in debt to end up in even more debt after they consolidate, and there are only so many times you can consolidate. It is important to have the right frame of mind before deciding to consolidate your debt, and to have the will not to land up in the same situation again.

Another disadvantage to a debt management program is that you cannot get new credit during this time. For some people, this is a good thing, as they need to learn discipline to ensure they do not get themselves into debt again. Unfortunately it is a fact of life that unexpected emergencies may occur as well as expenses you did not bargain for. Another thing is that some debts may not qualify for a debt management program, so you will still have to make multiple payments each month.
Another disadvantage could be that if you get an increase in your income, through a raise or a large income tax return, some debt management programs do not allow you to make extra payments ahead to your debts. Should you send them an extra cheque; they may simply hold that in an account for your next month's payment. It is a wise move for consumers using a debt management program to simply save any extra money they may have in an emergency fund or savings account.

It can also be difficult to consolidate. In using a bank loan to consolidate your other debts, you must qualify for a loan or mortgage. If you already have a lot of debt, your request may be turned down because the bank will feel you are too high-risk. On the other hand, to qualify for a debt management program, you actually need to have a minimum amount of non-house debt. This means your mortgage can not be included in a debt management program.

Whilst there are undoubtedly a number of disadvantages to consolidating your debt, sometimes the positive can outweigh the negative in the end. You may find debt consolidation through a debt management program to be the best option for your family. Simply be aware of the need to research each company and examine any loan offer very carefully.