Debt consolidation is a great way to combine debt and increase your credit score. However, if you are not careful, you could put yourself at risk for many things including high fees, damage to your credit, and much more. While consolidating your debt can save you money and help you quickly pay off debt, it is critical that you take all potential dangers into consideration before making this big step.
What are the Risks Associated with Debt Consolidation?
While places such as Symple Lending can quickly help you consolidate debt, it is important to consider all risks before you take the plunge.
Damage to your Credit Score
Debt consolidation loans will easily reduce your score from 5-10 points in the beginning. This is due to the hard inquiry that is placed on your credit report after applying. However, with time, you can gradually improve your credit score if you work to eliminate your debt a lot faster.
No Guarantee of Good Rates
Just because you apply for a debt consolidation loan doesn’t mean that you will automatically receive a good rate and a large dollar amount to cover your debt. There are certain things that are needed to qualify for a good rate, including your income, credit, and additional factors. This applies to both new credit card accounts and personal loans. It is also possible that you may not be able to receive enough money to pay off your existing balance.
Origination fees may be a part of debt consolidation loans that can be as high as 8% of the loan amount. For balance transfer credit cards, you may be charged balance transfer fees that can range from 3% to 5% for each transfer.
Risk of Losing Collateral
If you use a secured loan to consolidate your debt, you will risk losing the collateral if you are not able to pay your loan back. The lender will be able to take the collateral that you used to open up your loan.
Higher Credit Utilization
It is also possible that your credit utilization ratio may increase if you consolidate your debt using a line of credit or a credit card. This will ultimately hurt your credit score. However, loans do not count toward credit utilization, since they are not considered revolving credit accounts.
Ultimately, it is your decision to make whether you want to risk taking out a debt consolidation loan. At the end of the day, the risks may or may not outweigh the benefits. For further information, you can talk to a Symple Lending expert today.