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Why Do Debt Consolidation Loans Often Fail?

A debt consolidation loan is a refinancing process that allows you to pay off existing debt by borrowing money from a new or existing lender. The new loan can be a secured or unsecured loan.

A debt consolidation loan is one of the first and most common solutions people think of when they fall into financial difficulties, especially if they have excellent credit and a large amount of equity in their home.  Most people who get a debt consolidation loan find themselves in much deeper financial trouble than they were originally.

Let’s explore the advantages and disadvantages of debt consolidation loans?

What are the advantages of Debt Consolidation Loans?

Debt consolidation loans have many advantages:

  • Most debt consolidation loans are secured with home equity, and given at lower interest rates
  • They reduce the money spent on interest
  • They leave you with one lower monthly payment, versus many
  • They lower your monthly bill, thus improve your cash flows

Sounds great, doesn’t it?

But before you apply for a debt consolidation loan, let’s look at the disadvantages.

What are the disadvantages of Debt Consolidation Loans?

The list of disadvantages is long:

  • Debt Consolidation loans are a temporary bandage.  Debt Consolidation loans do not solve financial problems.
  • The most deadly form of debt consolidation loan is a private second mortgage. The interest rates and fees often exceed the current cost of servicing existing debts. In most situations they make matters worse.
  • The second most deadly form of debt consolidation loan is the one where the mortgage amortization is extended to thirty-five years or longer. Monthly payments are lower, but more interest is paid over the long-term.
  • Debt consolidation loans make it easier to accumulate more debt. With more money left over at the end of the month, many people start using their credit cards again and continue with poor spending habits.
  • Debt consolidation loans convert unsecured short-term debt into secured long-term debt. This disguises the cause of financial problems.
  • Most people, who take debt consolidation loans, end up owing more money over time and end up in a negative equity position with their home. That is especially true if a down turn in the economy occurs and property values drop.
  • Debt consolidation loans cost more long term, even though the interest rates are lower. If the loan is taken over a thirty-five year period, one may end up spending more money than if each individual loan had been kept in place.
  • Debt consolidation loans take longer to pay off.
  • Debt consolidation loans are usually secured by collateral. If payments are not made in the future, the property may be put in power of sales, foreclosed or repossessed.

Why Do Debt Consolidation Loans Fail?

Debt Consolidation loans often fail because they don’t address the cause of one’s debt. These loans simply reduce the negative symptoms caused by bad debt. They don’t actually treat poor money management skills, and the absence of a budget which are the often the root of the problem.

Many people who consolidate debt will manage to build a sizable debt load within twelve to eighteen months after taking that loan. Often, ending up in the same financial situation as before.

Sounds familiar, doesn’t it?

Debt consolidation loans work well for individuals who stop relying on credit to pay the cost of monthly living expenses and develop a budget that they are able to manage. And who remain dedicated to educating themselves on the topic of money management, change their attitudes about money and align their behaviors accordingly.

Do not despair! Debt consolidation many not be the right option.

There are more effective options that enable you get out of debt faster.

Click here now to fill out our no-obligation financial assessment. The personalize debt plan will tell you where you are and what actions you can do to get out of debt.

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August 25 2006 – George provided excellent service as our Mortgage Broker, he was friendly, flexible and able to handle what was potentially a problematic situation. He always offered sound advice and had our best interests in mind at all time. I would highly recommend him.
Grant Pennell - Inside Sales Manager
September 26 2007 – We came to you as first time buyers with some consumer debts after our bank gave the running around, seeking mortgage, we got home with far beyond that. Not only had you secured us an approval within 24 hours, you gave us the best rate at the time, and long lasting debt management help that has saved us considerable money and widened our smile; you helped changing our lives to the better.
Walid Bechara & Farah Dbouk
December 22, 2005 – We would recommend George Kaadi and his firm of experts with extremely high regard and confidence to our closest friends and family members. We only wish we had been introduced sooner, as we know George would have helped us to make better decisions about our future financial plans.
Bruce and Joanne H.
September 19 2007 – Based on the information he provided we were able to choose a strategy that was best suited to our situation and constraints. As such, he showed us how to use discipline and pay off our debts to then build and emergency fund and to invest our savings in vehicles I would not have come across talking to my banker. He taught me about tax savings and leveraging existing rules to increase my retirement fund using money the government would have simply kept to himself!
Andras Kovats
November 14 2007 I just wanted to say thank you for all the help that you provided my husband and I for our refinancing when we were having problems getting information from our bank for the same. Your knowledge and understanding of finances helped us to make the right decisions regarding our financial situation and living is now bearable and we can see light at the end of the tunnel after only a few short months, which is certainly not what the bank was helping us to do. We appreciate all th…
S. and J. McKenzie