Standing in red, credit cards and short-term loans: you know them and you know when and how you can use these money options to purchase something smartly and quickly before your salary or holiday pay is deposited.
A less well-known phenomenon is the consolidation loan. As the term ‘consolidation’ suggests, it is about merging different loans. At first glance, these types of loans seem like a handy solution. A consolidation loan turns your debt into a clear repayment amount per month. In some cases at a lower interest rate on a number of your outstanding accounts or loans.
Such a consolidation loan may sound too good to be true. And that is it. There are some disadvantages to this loan form and we obviously do not want to withhold it from you. Below five reasons not to:
The total amount of debt does not decrease at all
Due to the often lower monthly amount that you are going to pay, it may seem that your debt burden will decrease. But nothing is worth less. The total amount that you have to pay remains the same.
The total interest costs go up
Sometimes the consolidation loan offers a lower interest rate per month. But because in such a case the loan is often spread out over a longer period, you ultimately pay more in total. A simple calculation shows how this can turn out to your disadvantage: 3 dollar interest per month interest costs over a period of 6 months comes out at 18 dollar total interest costs. 2 dollar interest per month over a 12-month period comes to 24 dollar total interest costs. That is a whopping 33% more interest costs with a consolidation loan!
You must pay an additional fee
The provider of the consolidation loan provides you with a service by combining your debts. They often charge an additional fee for this operation. Or they earn it back because you are going to pay more interest costs. Because as with so many things in life: the sun rises for nothing.
You get the best conditions for a consolidation loan with a good credit score
The most favorable conditions for a consolidation loan, ie the lowest interest rates and fees, often depend on the credit score. And you guessed it: that score is often not as good if you have several loans or debts. In other words: that advantageous consolidation loan does exist, but you are not eligible for it. Be warned!
You keep your debts longer
In many cases you do not take out loans and debts because you want to keep them as long as possible. With a consolidation loan, the duration of the loan is often extended, because this is one of the ways to reduce the repayment amount per month. So check carefully whether you are waiting for such a loan over a longer period.
In short, be careful if you are considering such a loan. First contact the creditors to see if you can make an arrangement with them. It generally pays if you first pay off debts with a high interest rate. Also, paying off individual loans quickly can help you to be completely debt-free again in the much shorter term. That was the intention anyway, right?