Debt Consolidation Loan Consequences

Every action has a consequence. We don’t like to admit it, especially when the consequences are negative, but it’s true! Our financial actions have consequences too, and when we are looking into bleak financial times like we are now, we must consider the debt consolidation loan consequences before we turn difficult financial circumstances into near impossible. A debt consolidation loan may not be your best choice.

Like many Americans today, I have too much credit card debt. I know it, and I want to fix it. I have considered the best way to fix it, and a debt consolidation loan is one way that has been on my radar screen. I wanted to be sure I wasn’t getting into something that was going to make my financial situation more treacherous, so I began to research various scenarios to the debt consolidation loan possibility.

Knowing that my goal was to free up my credit cards, not so I could use them more, but to lower my payments and eliminate some of the credit I was carrying, I knew that I would close all but one of my existing credit accounts if I took out a consolidation loan. I have heard stories from friends who didn’t think that far ahead. They took out a debt consolidation loan, but didn’t close their existing credit accounts.

The consequences for those actions were disastrous. Once the pressure was off and the payments and interest rates were significantly lower on the loan than on the credit cards, my friend found her heart longing for the same lifestyle that had put her in debt. She resorted back to the cards she had that were now free from any balance. You guessed it, she charged to her heart’s content, and now she has all her original credit card debt, along with the payment for the consolidation loan she took to pay off the credit cards. She is living with the consequences of having too much credit available to her every day! Her credit score is in the tank, and she can’t move or buy a car because nobody will loan her money.

Having seen my friend go through her crazy struggle by putting herself right back into the debt she just paid off, I resolved to close my credit accounts, except the one I keep for emergencies. The results for me were just the opposite of my friend. My credit score has jumped from average to exceptional. I have dropped the amount of credit available to me on my credit report, and I have made timely payments on the consolidation loan. Both of these efforts have raised my credit score making me a more attractive risk to lenders, even though the economy is struggling. I was able to qualify for the car loan I needed, at an interest rate I was willing to pay.

Other consequences to debt consolidation loans depend on the type of loan you secure. If you get a secured loan, you run the risk of losing collateral, which most often is your home. While a home equity loan for something like home improvement is a worthwhile investment for most people, using your home for collateral for a debt consolidation loan can lead to repossession. If you are having a hard time paying your bills, using your house for collateral can be disastrous. There are other options to consider before the drastic option of a home equity loan!

If you get an unsecured debt consolidation loan, you run the risk of very high interest rates. They may be lower than the credit card rate you are carrying, but be sure to read the fine print so you don’t end up with an interest rate that is higher than your credit rate if you miss a payment or get one made late.

While a debt consolidation loan can have great consequences and help you pay off debt and improve your credit score, that does not happen without a plan and great efforts to stick to your plan! Create a budget, stick to it, and watch your debt decrease while your credit score increases.