The Dangers Of A Debt Consolidation Loan

Consolidation loans are often the first option people think of when they find their debt is stretching their budget. If you qualify for a loan to consolidate your debt, it means you will have one monthly payment, a better interest rate than your credit cards and the debt will be paid in a fixed timeframe. When you compare this to the alternative of trying to juggle all those minimum monthly payments, it seems like a great option. But the truth is, consolidation loans are not always the best solution to dealing with your debt problems.

Problems with Consolidation Loans

One of the main issues with a consolidation loan is you are not actually lowering the amount of your total debt level. If you’re carrying a challenging level of debt, it’s likely your household cannot afford to, even if it’s consolidated into a prettier package.   Consolidation loans often require a fixed monthly payment and a maximum term of three or four years. This means your monthly payment obligation can still be higher than is affordable for your budget.

When deciding if the loan payment is affordable, individuals will often look at whether it is less than the minimum payments they were making on their credit cards. What they fail to consider is whether they were continuing to use their available credit to pay for regular household expenses. If you are maintaining your minimum payments on your credit cards but still relying on credit to live, this is a sign you may not be able to afford the consolidation loan payment.

The other danger with a consolidation loan is that over time, debt can actually increase during the period of the loan term. This is because the burden of paying that consolidation loan on the household budget can mean there is no money left to save for emergencies or incidentals. When those things come up, the solution can be to apply for additional credit. If this pattern continues, people often find they are then faced with paying the sizable consolidation loan along with maintaining additional credit card debt. Because of this, consolidation loans can end up leading to an increased debt load over time, rather than helping you to become debt free.

Other Solutions

If a consolidation loan is not right for your household, there is another option called a Consumer Proposal. A Consumer Proposal is meant for individuals that can afford to pay something toward their debts, but cannot afford the entire amount, particularly with the interest charges. A Consumer Proposal allows for one monthly payment that fits your budget over a period of five years or less. The interest on the debt stops and so does the collection activity.

If you have been considering a consolidation loan, but are not sure if it is right for you and your family, you owe it to yourself to explore a Consumer Proposal. Sit down with a trusted advisor for a free confidential consultation and find out if the Consumer Proposal is your best choice to end the cycle of debt.