Nowadays many people are becoming quite careless and spontaneous in their spending pattern. People are spending so much that they are taking debts to finance their shortages. Not only debts but people are also using multiple credit cards so that they get the most out of their shopping ventures. So it is but obvious that at some point or the other, they are going to face a sudden mountain of debt. This mountain is quite dainty and stresses creating, and it can be the breaking point of your life.
This is where your choice matters. What are you going to do? Are you going to plan your finances and manage the debt systematically, or are you going to choose the easier but riskier way out in the form of debt consolidation?
Debt Consolidation the Saviour Which Can Be the Destroyer
Debt consolidation is the process through which you merge your multiple types of debts like a car loan, housing loan, etc. and also your multiple credit card bills together, to settle everything at once in a single consolidated debt. What you look for in this type of settlement is a benefit in interest costs, reduced number of installments to be paid, and only a sole creditor to be dealt with. However, even if this process appears to be attractive, there are a lot of risks involved which are probably not even so easy to identify. Therefore you must always give your debt consolidation thoughts a second look based on a proper risk rewards analysis.
It Begins With What Type Of Debt Consolidation You Choose
- Secured Debt consolidation & Its Risks: Secured Debt Consolidation refers to taking the single consolidated loan for settlement of existing debts by providing collateral security in the form of an asset or a property or a vehicle, etc. Thus when you are unable to pay off this debt as well, your collateral security shall be confiscated. The huge plus point of this type of debt consolidation is that the consolidated loan is easily available to you without any scrutiny of your credit history or credit scoresince you are giving a backup option of recovery in the form of collateral security. However, there are a few major risks associated with this type of debt consolidation. Firstly, you need to choose the creditor bank or financial institution wisely because lately there have been a lot of debt consolidation frauds surfacing.
The fraud cases mostly have a similar pattern where the aggrieved person takes a consolidated loan from a not so popular bank or financial institution, and the fraudsters make the agreement policy such that the total amount payable somehow exceeds the total value of all original debts by a huge margin. This makes the victim nowhere to go and compulsorily pay the huge liability to the fraudsters.
Another risk is of losing your asset or property that you’ve committed as collateral security. Because in case of default, it is going to be gone.
- Unsecured Debt consolidation &itsrisks: Unsecured Debt consolidation refers to taking a single consolidated debt to settle multiple existing debts, but without providing any security or backup. It means that you need to settle this debt just like any other normal debt. But the major concern here is that in case of unsecured debt consolidation, the creditor bank or financial institution conducts an in-depth analysis of your credit history, repayment frequency, default percentage, etc. and most importantly it provides you the consolidated debt only if you have a good credit score above their required limit. And as you have already been taking a lot of credit without being able to repay it, your credit score is not going to qualify for it. So this is a big risk and drawback of unsecured debt consolidation. Another risk is the inability to repay this consolidated debt as well, which will put even greater debt burden on you.
Further Problems Even If You Pick the Right Type of Debt consolidation:
- Credit Card Woes: Many credit card companies themselves provide you with options to consolidate the overdue balances on all your credit cards into one single balance, i.e., consolidation. This kind of benefit is called a balance transfer option, but there’s a big problem in this option. That is, all these companies make it mandatory for you to clear certain proportional amount due on your credit cards to be eligible for the zero balance benefit. This means that in addition to the consolidated amount, you also have these other dues to be paid, and inability to do so directly affect your credit score.
- Credit Score Problem:Your credit score is dependent on the frequency of debt repayment along with the percentage of the amount due you repay every time. If you are spot on with your repayments along with the full amount due, your credit score will be the highest. But since you are doing debt consolidation, it is obvious that you are not going to repay the previous dates exactly how they are required to be repaid. This means your credit score is bound to get affected and on top of that, you are taking another debt in such a situation which increases the likeliness of dipping your credit score. So all in all, debt consolidation is a loss-loss situation for your credit score.
- Ultimately facing bankruptcy: If you are in a very poor financial condition, you won’t even be able to repay the consolidated debt and then ultimately you will be left with no option but to file for bankruptcy. This will always be the risk factor in debt consolidation.
In today’s time when a greater proportion of the population believes in the ideology of spending more than saving, debt taking percentage is shooting the skies. People are taking debts to fulfill all their wishes, and they are also going to the extent of using credit cards for their daily shopping. All this is only leading to take them into deep dungeons of debt. As a result, they are clawing on to solutions like debt consolidation which are helpful only if everything goes correctly. But if there’s absolutely any sort of mistake or fraud in the process, it will only add to your debt issues.
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