Disadvantages of Debt Consolidation
A debt consolidation loan or a credit card with balance transfer may seem like a good way to streamline debt repayment. However, there are some risks and drawbacks to this strategy.
1. May come with additional costs
Taking out a debt consolidation loan may incur additional costs such as assembly costs, balance transfer fees, closing costs and annual fees. When shopping for a lender, make sure you understand the true cost of each debt consolidation loan before signing on the dotted line.
2. Could increase your interest rate
If you qualify for a lower interest rate, debt consolidation may be a smart move. However, if your credit score is not high enough to access the most competitive rates, you could end up with a higher rate than your current debt. This can mean paying an origination fee plus additional interest over the life of the loan.
3. You can pay more interest over time
Even if your interest rate goes down on consolidation, you could still pay more interest over the life of the new loan. When you consolidate debt, the repayment period begins on day one and can be up to seven years. Your overall monthly payment may be lower than you’re used to, but interest will accrue for a longer period.