Debt consolidation is one of the most common solutions that people fall back on when cornered by major financial problems.
Unfortunately, they do not realize that by opting for debt consolidation loans there is a chance of getting into deeper financial troubles.
The simple statement that goes a long way to explain this is, that borrowing can never be a way to get you out of debt.
It is a known fact that a debt consolidation loan can pay up all your other debts so that you do not need to pay five different interests and instead consolidate your interest into one single amount.
However, it is important to remember that debt consolidation does not lessen the amount of debt that you actually need to pay off.
Even after availing of a debt consolidation loan you will need to pay back the full loan amount including the interest on it.
Additionally, you may take a longer period to repay the full amount of the loan and the interest as compared to the other debts, some of which you could have paid off in a shorter period.
In order to secure a debt consolidation loan, you will need to place any of your assets as a security against the loan.
This changes your debt status from an unsecured debt to a secured one.
Moreover, there are a number of debt consolidation loans that may be spread over a period of 15 to 30 years, which leaves you in danger of losing your assets at any point of time, in case you fail to keep up with the payments.
Most people use their homes as security and put themselves at risk of losing their homes at any time.
It is also important to know that debt consolidation companies earn a huge amount of commission for signing people up for these loans.
The amount of money they earn is proportional to the amount of money they lend you.
Therefore, invariably, they will try and insist that you take the maximum amount possible.
As a result, you might be left with a legal contract that might rob you of all your rights and assets and make them appear as harmless, even if they claim your own home.
The other advantage that is often associated with debt consolidation loans is the tax break that borrowers might receive on the loan amount.
However, the fact is, you will receive the tax break only on the interest amount and that means you are actually paying money, which you would not have to, in case you did not take this loan.
Apart from all this, entering into a new debt will definitely have its effects on your take-home salary.
At times, it might reduce your spending capacity so much so that you will not even be able to pay for your essential items.
All a debt consolidation loan will do is give you a little breathing space and a lower rate of monthly interest, but it is definitely a point of consideration whether you want to continue the same way for the next 30 years.
Even the chances of a lower interest rate are doubtful with a huge amount of debt already on your name, since low interests are secured for people with good credit histories.
In short, it might be a temporary solution, but of course not a very good long-term option.