Risks of Debt Consolidation Loans

Unsuccessful dieters all share a common trait: Once they take off their desired pounds, they lack the discipline to keep it off.

People in debt have the same problem, especially when it comes to debt consolidation loans. After they've closed the loan, they feel great for a while. However, without some significant lifestyle changes, that debt tends to return. When it does, the consequences could be far more serious.

It's actually one of several risks that come with debt consolidation loans. Here's a closer look:

Lower monthly payment, more long-term interest

Typically, a debt consolidation loan involves refinancing all your credit card balances, many of which have high interest rates. You consolidate these balances into a loan with a lower interest rate, which will save you money on a monthly basis.

However, that lower rate won't necessarily save you money over the long haul. If you choose a first mortgage, or a fixed-rate, fixed-term second mortgage, you'll lengthen the amount of time it will take to repay the loan. Your monthly payments may be lower, but you'll spend a lot more in long-term interest rates over the long run.

Wiping the slate clean can wipe you out again

It's a relief to have a debt consolidation loan reduce your credit card balance to $0. To an impulsive spender, that may be misinterpreted as a green light to go shopping. Resist this desire. If you run out and run up those credit card balances, you'll undo all the benefits of your debt consolidation loan.

In fact, you'll make things even worse. A lender is far less likely to give you another loan if you show an inability to keep your debt under control.

Avoiding risky business

There are some simple steps that you can take to avoid the risks of debt consolidation loans. First, in order to avoid paying excessive amounts of long-term interest dollars, consider the loan a temporary measure. Eventually, if your income increases, use that extra money to refinance the loan to a shorter term. You can also pay more toward the principal.

Second, put together a budget. If you have a propensity to overspend, a budget will instill some discipline and help you resist the tendency to whip out the plastic.

Like any lifestyle change, the key to making a debt consolidation loan successful is to change your lifestyle. Don't run up the balances on those credit cards, and set up a budget that includes applying extra payments to the principal on your debt consolidation loan. You've shed your debt. Now, use a little discipline and a lot of commitment to keep yourself in great financial shape.

By:Greg Mischio