Multiple debts or loans are a serious financial crisis that will need immediate action. The main way most people deal with such an issue is through debt consolidation.
Below are some of the disadvantages of consolidating your debt
Your creditors may not agree or be pleased with your debt consolidation plan
The main aim of debt consolidation is to combine all your outstanding balances from your credit accounts and make them into one huge debt in one account. When you do this, you will be able to make one monthly payment instead of several payments. You have the freedom to choose the type of debts you want to incorporate or bring together when you are consolidating your debts. When the debts are cleared into one account, you may face lower payments and interest rates. This will not be pleasing to all your previous creditors and they may choose to sue you for breaking the contract signed during loan approval.
There may be an increase in debt
Consolidation services are not offered for free by the consolidation companies. You will incur some charges for the process of debt consolidation. Some companies will even impose extra fees and hidden charges to their services. Making a contract with the companies will give them a right to collect their charges first before dispersing the money to the debtors when you make the monthly payments. If you do not deposit enough money, the consolidators will take what they need to and your creditors may stop receiving their monthly payments. Your assets and paycheck may be attached to the documents, which put you at a high risk of losing them.
You can’t make any decisions over any payments
When you consolidate you debts, you will have zero power on how the payments will be made by the consolidation company. On the other hand, the consolidation company will have the power to make decisions on full and partial loan payments to your credit accounts. It they do not make the correct payments and the deadline hits, you will get more charges and your credit points will lower.
You may end up losing your job. Creditors who have information about your workplace and your employers contact may call about the late payments, consolidation and huge debts. Untrusting employers will fire you when they confirm you cannot make good financial decisions. If not your job, you may lose respect and other opportunities like promotion.
Balance transfers will cost you a lot
Transferring all your debts into a main account may impose a lower interest rate but only for a short while. After a given period of time, the interest rates will start to increase to a point where paying the loan off in individual account would have been cheaper. Using the consolidation loan for purchases may increase your loan cost. Making the monthly payments in minimum will also keep you in debt longer than you should, automatically increasing the interest rates.
Most consolidation companies use your home equity as collateral
For their own safety, the consolidation will take your home equity as their collateral. When you do not make the payments on time the will sell out the equity to get back their money and also clear the loan. When you think about it, giving out one of your most expensive asset as collateral is a risky game.