What are the risks associated with debt consolidation?

Debt consolidation is when a person or organization takes all of their existing debts and combines them into one single debt with one payment. Although debt consolidation can be helpful as it simplifies payments, it does have associated risks. First, debt consolidation can lower a person’s credit score. When combining numerous debts, the credit report bureaus may view the consolidation as one new loan amount. This can be seen as a risk for the lender, who is taking on a larger debt than before. The lowered credit score may result in a higher interest rate. Secondly, debt consolidation can be risky because it can extend the length of debt repayment. Although having just one payment may be easier, the payments could end up lasting longer with the lower monthly payment. This means that the total amount that must be paid back will be significantly more than the original debt due to the interest rate charged for the consolidation. Thirdly, the consolidation process can be complicated and if done incorrectly, could actually make a person’s financial situation worse. If the company handling the consolidation process is not reliable, or if the paperwork is not completed correctly, the person may end up owing more than they did before. Overall, debt consolidation is a viable option for someone who is overwhelmed with multiple debts and has a hard time managing them. However, it is important to be aware of the risks associated with debt consolidation so that a person can determine if it’s the best option for them.

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What are the risks associated with debt consolidation?

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