Possible Complications Of Debt Consolidation

Debt consolidation can seem like the perfect answer to your debt problems, but it is important to understand the possible complications of debt consolidation. When you consolidate debt, there are a number of different ways to go about getting the consolidation loan. Each of these different methods, as well as the process of debt consolidation itself, can have several possible complications.

Possible Complications of Debt Consolidation

Debt consolidation simply involves taking out a new loan in order to consolidate all of your existing debts into one. The possible complications of debt consolidation vary depending on the nature of the consolidation loan. There are three common ways to consolidate debt: a balance transfer, a personal loan or a mortgage loan. There are benefits and drawbacks to each method, along with potential risks or complications associated with each. For example:

• With a credit card balance transfer, you are usually charged a fee equal to around 3-5 percent of the amount of money transferred. There is no limit in many cases to this fee. You also often get a special promotional rate- such as 0 percent for six months or a year on transferred balances- that makes the loan attractive. However, if you make a late payment or breach your card member agreement, the special interest rate can end and you can be charged a very high APR.
• With a personal loan, there may be a long application process or a stringent credit check from the bank or credit union granting the loan.
• If you do a mortgage loan consolidation by taking a second mortgage or a home equity line of credit and using that money to pay off your debts, you convert unsecured debt such as credit card debt into secured debt. That means creditors could potentially take your house if you don't pay since the house is collateral. Unsecured creditors such as credit card companies don't normally take your house to collect debt.

Credit and Debt Risks and Complications

There are two other possible complications of debt consolidation that exist no matter what type of consolidation loan you take.

• Once you have consolidated all your debt, the old credit lines that you transferred the balances from are open. This can tempt many borrowers to fall back on bad spending behavior and charge those cards up again, leaving you both with the consolidation loan and the new loan. This can put you in a far worse financial situation than before.
• Consolidating debt can have a short-term negative affect on your credit since you usually take a new loan out to consolidate. That means you lower the average age of your credit history and have an inquiry on your credit report, both of which adversely affect your credit score.

Getting Help

Before consolidating debt, or if you are dealing with the possible complications of debt consolidation, it is a good idea to talk to a debt consolidation or debt settlement attorney who can provide you with advice and guidance.