Does a Debt Consolidation Loan Harm Your Credit in Any Way?

By | September 7, 2013

A debt consolidation loan is provided through a bank or a financial institution and it can be unsecured or secured by the pledge of collateral. The biggest concern when it comes to debt consolidation loan is whether it will harm your credit or not.

A debt consolidation loan is aimed at lowering the interest rate that you pay to your creditors. It can lead to an improvement in your credit rating by making your debt easier to manage. This particular loan is obtained and is used to pay off those smaller loans which are at higher interest rates.

For instance, if you have many outstanding balances in multiple accounts, you are advised to apply for a debt consolidation loan to pay off these debts. Then focus your repayment on one consolidation loan only.

It is very important for you to remember that the main goals of getting debt consolidation loan are to:

  • Manage your debt according to the amount you can afford or
  • Enjoy the reduced interest rate or
  • Extend the duration to pay off your debt

There is no point for you to obtain debt consolidation loan if you don’t achieve any of the goals stated above.

In normal circumstances, having debt consolidation loan will not harm your credit in any way if you make your repayment according to the schedule given by your lenders unless you fail to meet the repayments. Below are the situations where debt consolidation loan is indeed harmful to your credit. Let’s take a look at the possible situations:

  • In general, a debt consolidation loan will convert an unsecured debt into a secured debt. In fact, it is not a good thing especially if there is something happens to you and you are unable to make your repayment on time. Just imagine if you are having financial difficulties and you are not able to make payment on your home equity loan for a certain period of time, you would face the possibility of losing your home.
  • When you consolidate your debts, you are in fact extend the time to pay off your debt. If you really take a closer look, you are in fact paying more in interest charges. Furthermore, the duration for you to become debt free is extended.
  • Once you get a debt consolidation loan and you still maintain your spending habits as previously, you are actually making your financial situation worse. You will end up having more debts.

To sum up, when you are drowned in deep debt, getting yourself a debt consolidation loan may either assist you or make your financial situation worse. You should bear in mind that debt consolidation program is specially designed to shift your debt but not to eliminate your debt. You still owe the money to your creditors and you still need to pay off all your debts sooner or later.

 

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