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Disadvantages of Debt Consolidation

While there are many advantages to debt consolidation, there are a few concerns anyone should be aware of before consolidating.

You need to watch out for scams and non-profit credit counseling companies which are actually for-profit companies, as well as things which are actually a disadvantage to you - sometimes the benefits which a DMP can provide are actually benefits you could get yourself from the lender if you just ask, for example on a student loan, in some programs after a certain number of on-time payments, your interest rate is lowered a little bit. If you go with a debt management program or consolidate your student loans with a bank or other lender, you start over with the time period, so it can actually take longer for your interest rate to go down.

A disadvantage to debt consolidation through a second mortgage or a bank loan is that this is usually a secured loan. If you do not pay this bill, you can lose your home. Also, you are still in debt, and usually still in the exact same or a slightly lower amount of debt, just shifted around. Many people respond to this debt consolidation as if they have no more debt, and go out and charge up their cards again. Thus, it is easy for a person in debt to end up in even more debt after they consolidate, and there are only so many times you can consolidate.

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Another disadvantage to a debt management program is that you cannot get new credit during this time. For some people, this is a good thing, as they must learn discipline, but emergencies do happen and expenses occur. As well, some debts may not qualify for the debt management program, and so you will still have to make multiple payments each month. A disadvantage in the event that you get an increase in income, through a raise or a large income tax return, is that some debt management programs do not allow you to make extra payments ahead to your debts. If you send them an extra check, they might simply hold that in an account for your next month's payment. Many consumers using a debt management program simply save any extra money in an emergency fund.

It can also be difficult to consolidate. For a bank loan to consolidate your other debts, you must qualify for a loan or mortgage. If you already have a lot of debt, your request may be turned down. On the other hand, to qualify for a debt management program, you actually need to have a minimum amount of non-house debt. (Your mortgage cannot be included in a debt management program).

While there are a number of disadvantages to consolidating, you may find it is the best choice for you and your family. Simply be aware of the need to research each company and examine any loan offer carefully.

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