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Here are some risks that debt consolidation caries:

  • Some Loans Have Prepayment Penalties– Prepayment penalties aren’t as common as they once were, but they remain a factor in debt consolidation decisions. Where they exist, prepayment penalties may erode the case for consolidation. Always crunch the numbers to determine the net cost of an early payoff.
  • Subprime Borrowers May Struggle to Find Affordable Loans without Collateral – Credit-impaired borrowers may struggle to qualify for unsecured debt consolidation loans with suitably low monthly payments, finance charges, or both. Such borrowers may need to put up valuable collateral, such as car titles, to qualify for secured debt consolidation loans.
  • Secured Debt Consolidation Loans Risk Asset Loss – Although they invariably carry lower APRs or fixed – rate than comparable unsecured loans, secured debt consolidation loans present a unique risk for delinquent borrowers: potential asset loss.
    There is a huge downside to consolidating unsecured loans into one secured loan. When you pledge assets as collateral, you are putting the pledged property at risk. If you can’t pay the loan back, you could lose your house, car, life insurance, retirement fund, or whatever else you might have used to secure the loan.
  • One Loan Can’t Change Unhealthy Financial Behaviors – Using a debt consolidation loan to wipe out high-interest debts may actually reward unhealthy financial behaviours. While all debt-ridden borrowers stand to benefit from debt consolidation, those who inched into debt through poor money management must take concrete steps to avoid a repeat in the future.