Debt consolidation is one of the best ways to reduce debt. Your monthly payments become much lower and this will give you more disposable income. Unfortunately, debt consolidation can also make your situation worse. The reason debt consolidation can be bad is you. You and your bad financial habits. This is how you got into debt in the first place.
Lack of financial discipline
If you get a debt consolidation loan, you have given your finances a break. This means that you must cut your credit cards and accept no more forms of personal credit. This is because even though your payments are lower, your level of outstanding debt is the same. It has just become more manageable.
If you don’t discipline yourself in this area, you will find yourself in serious trouble. If you accumulate more credit card debt, you will have to meet your credit card payments as well as your debt consolidation loan payments. The reason you got the loan in the first place was to ease debt stress. This is a surefire way to get into more financial trouble.
Credit is not your money
Many consumers feel that the available credit on their credit card is their money. Once your credit card balance is canceled, you are not in a position to use that money again. By using that line of credit, you are incurring more debt that you will ultimately have to pay off. The best way to avoid debt is by not using easy credit and realizing that credit is not your money.
Your home could be at risk if you don’t keep your payments.
Most basic forms of credit, such as overdrafts, credit cards, and personal loans, are forms of unsecured debt. This means that the lender has slowed down your money based on the information they have provided about your income and your ability to pay the payments without requiring any collateral against the debt. The main reason these forms of credit are not guaranteed is because the amounts are normally small in relation to the applicants’ income.
Debt consolidation loans, in general, are secured loans, usually secured against property. This is the reason why the rates can be lower than those of the commercial personal loans. Loans need to be secured because every person who applies for a debt consolidation loan is classified as a credit risk and has a history of indebtedness. To offset this risk, the lender will request that a security be placed against the loan. If you don’t make your loan payments, you can lose your security.
This is why self-discipline is so important in debt reduction because it can easily make your position much, much worse if you continue to treat debt in a frivolous way.