Adam McCann, Financial Writer
@adam_mcan
The biggest risks associated with debt consolidation include credit score damage, fees, the potential to not receive low enough rates, and the possibility of losing any collateral you put up. Another danger of debt consolidation is winding up with more debt than you start with, if you’re not careful.
While debt consolidation can often save borrowers money and help them pay off their debts faster, it’s important to consider all of the potential dangers before consolidating.
5 Risks of Debt Consolidation
- Credit score damage: If you apply for a debt consolidation loan or credit card, your score will drop 5-10 points from the hard inquiry. But consolidating debt can help improve your score in the long run if you get rid of your debt sooner.
- Good rates and large dollar amounts not guaranteed: Depending on your credit, income and other factors, you may not be able to qualify for a loan or credit card with lower rates than the APRs on your existing debts. You might not be able to get enough funding to pay off all your existing balances, either.
- Fees: Debt consolidation loans may charge origination fees of up to 8% of the loan amount. Balance transfer credit cards may charge 3% to 5% of each transfer.
- Possibility of losing collateral: If you consolidate with a secured loan, and you are unable to pay that loan back, the lender will take possession of the collateral that you put up to open the loan.
- High credit utilization: If you consolidate using a credit card or other line of credit, your credit utilization ratio may increase. That will hurt your credit score. But loans do not count toward credit utilization, since they are not revolving credit accounts.
It’s up to you to decide whether the dangers of debt consolidation are worth the potential benefits. Check out WalletHub’s guide on debt consolidation to learn even more about the process.
People also ask
Is debt consolidation a good idea?
Debt consolidation is a good idea for borrowers with high-interest debts owed to multiple lenders. Whether or not debt consolidation is wise depends largely on if you can get a new loan or credit card that will save you money compared to the current cost of your debts. The simplicity of a single payment can be helpful, too.
How Much You Can Save With Debt Consolidation
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Why is debt consolidation a bad idea?
Debt consolidation is a bad idea if it does not save you any money. This happens when the interest rate on your new loan or line of credit ends up being higher than that of your existing debts, which mostly defeats the purpose of consolidation. In that case, the only benefit would be having all your debts in one place. Debt consolidation may be a bad idea in other situations too, like if you work...
read full answer by Adam McCann, Financial WriterWhat are the cons of debt consolidation?
The disadvantages of debt consolidation are that it's hard to get a worthwhile rate with below-average credit, not all debts are eligible, and there is a possibility of fees. There is also the danger of debt settlement services posing as debt consolidation, which can lead to significant credit-score damage.
The pros of debt consolidation outweigh the cons, but it's important to consider both sides when you're thinking about consolidating.
5 Drawbacks of Debt Consolidation
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