When a Loan for Debt Consolidation Should Be Avoided

Even if you have a lot of debt, there are situations and circumstances where a loan for debt consolidation is simply not a good idea. 

Too Much Debt, Too Little Assets

How much is too much debt depends on an individual's circumstances, whether they have steady employment, how far behind they are on their payments, and willingness to repay any or all of the debt.  Couple too much debt with too little in the way of tangible assets - like a home, automobile, second residence, stocks, bonds, cash reserves, etc., -- and you have an immediate red flag that a loan for debt consolidation probably won't be in the cards.

Bad Credit Risk

One of the reasons your debt may have become insurmountable is that you have missed or skipped payments on a repeated basis.  This makes you a bad credit risk, and that's a situation where lenders want to look the other way.  One look at your credit report is often enough for the lender to turn down your request for a loan for debt consolidation.  Even if you do qualify, however, the higher interest rate you'll likely have to pay may be prohibitive.

Amount of Interest Exceeds Amount Borrowed

Over the length of the loan for debt consolidation, if the amount you'll pay in interest exceeds the amount you originally borrowed in the first place, this is another reason to avoid getting into a debt consolidation loan.

Debt Consolidation Loans Don't Solve the Problem

Just because you may be able to obtain a loan for debt consolidation doesn't mean that you are out of the woods.  Some 70 percent of Americans who take out a home equity loan to pay off credit cards, for example, wind up with the same or higher debt within two years.  Without sound budgeting and better tools for money management, you could end up worse down the road than you are right now - another reason to avoid a debt consolidation loan.

You Could Lose Your Home

Secured loans for debt consolidation, like a home equity or HELOC, mean that your home serves as the security backing the loan.  If you default on your payments, you risk losing your home.  That's an extraordinary risk, and one that should deter people from thinking about a debt consolidation loan except in extreme circumstances.  It only takes one unforeseen event or illness to wipe out whatever you have left and cause you to be unable to make your debt consolidation loan payments.  It's better not to put yourself at risk of losing your home.

Long-Term Commitment

Once you make the decision to get into a debt consolidation loan, it's a long-term commitment.  This often involves years and years - 15 to 30 years, depending on the length of term, especially if it is a cash-out refinance or home equity loan.  Do you really want to be saddled with this burden of debt hanging over your head and limiting your future options?  A better choice is to streamline your expenses, lock up your credit cards, work out repayment plan and create a workable, efficient budget.  This type of discipline will not only help you become more financial responsible, it will also reduce your outstanding debt.

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