Does Debt Consolidation Have Risks?

Chloe Meltzer

February 25, 2021

Don't go to jail over your debt.

Summary: Debt consolidation might feel like the only way out. But is it all it's cracked up to be? Find out if it's a smart idea to start paying off your accounts with debt consolidation.

Like many other people all over the country, you may be struggling financially. Although this is common, there are solutions. Some may seem like an easy way out, but they are not always the best options to choose.

Whether you have one major debt, you are going into foreclosure on your home, or even considering bankruptcy you may have heard of debt consolidation. If you are struggling with paying off multiple debts then you may be considering debt consolidation. Before you decide to do this, you must understand the advantages and disadvantages that come with debt consolidation as well as the risks and rewards.

How Debt Consolidation Works

When you decide to consolidate your debt it turns multiple loans or payments into one single loan. This provides you the ability to pay off all of your debt in one large monthly payment, rather than struggle to organize all of your different payments.

The purpose of debt consolidation is to make your life easier. The thought is that if you have one payment, it will be easier to focus and pay off that debt. Typically debt consolidation also allows you to lower the interest rate, reduce your monthly payment, and ultimately pay off your debt more quickly.

It is important to note that a debt settlement is not the same thing as debt consolidation. Debt consolidation has less risk than a settlement. It allows you to pay your debt completely without negative consequences to your credit report.

Debt consolidation is different depending on whether you have a secured or an unsecured loan.

File a response to debt collection lawsuits fast with SoloSuit.

Secured vs. Unsecured Loans

If you are looking to understand debt consolidation options, then you also need to understand the difference between a secured and unsecured loan.

Secured Loans — Mortgages and Car Loans

Mortgages and car loans are considered secure loans. When you take out a secured loan, you pledge your property. With a mortgage, you are offering your house in exchange for the debt if you do not pay it, and the same as with a car for a car loan.

Essentially, when you obtain a mortgage loan, your house is offered as security to that loan officer. If you fall behind in your debt, a foreclosure will occur to repay the loan officer for the loan.

Unsecured Loans — Credit Card Debt, Medical Debt

Unsecured loans are based on your promise to repay them. Although they are not secured by any property, typically they are offered based on your credit history. An example of an unsecured loan is a credit card. This is why a credit card carries a higher interest rate because there is more risk if you decide not to pay it back.

Secured Loans — Mortgages, Auto Loans

When looking to consolidate your debt there are many options using a secured loan. This means that you can choose to refinance your house, take out a second mortgage, or obtain a home equity line of credit. You can also take out a car loan, or use your car as collateral, or if you have a life insurance policy with cash value, you might be able to obtain a loan against that policy.

Putting up your house or car to pay off your loan is a risk. Consider the fact that you may not be able to pay off your debt consolidation loan and then you lose your home in the process? Although you can also use a 401K to use your retirement as collateral, you are putting your future at risk.

Protect your collateral by filing a response with SoloSuit.

Pros and Cons of Debt Consolidation with a Secured Loan

There are some positive aspects of consolidating with a secured loan. Secured loans typically have lower interest rates which will allow you to lower your overall payment, and save money in the long run. Interest rates can also be tax-deductible meaning any interest paid on a real estate loan will be considered a tax deduction.

When you consider paying one monthly payment with a lower interest rate versus many with different rates, you will save money. It is easier to obtain a secured loan because there is less risk of default. Despite this, there are many risks with debt consolidation under a secured loan as well.

One of the major risks associated with consolidating unsecured loans into one secured loan is that you put your property at risk. Whether this is concerning your home, car, 401K, or whatever your collateral is, you run the risk of losing this property.

Since you already have a history of not paying your debt, do you trust yourself to do a better job of paying this debt? Certain assets, such as life insurance or retirement funds may no longer be available to you if you do not pay the loan back, or until you pay the loan back. This not only puts yourself at risk but also your family.

Consolidated loan debts are typically going to be longer terms than the original debts. This means that although you may have already paid off the debt originally, you will be continuing to pay the loan, along with interest. Even though your monthly payment is lower, you do run the risk of paying more in the long run.

Debt Consolidation with an Unsecured Loan

Unsecured personal debt consolidation loans are less common than they were in years past. If you want to have any chance of consolidating your debt with an unsecured loan, then you will need to have a great credit profile. Good credit and debt consolidation don't typically go hand in hand, therefore this is not at all common anymore.

FInding a no-interest, or low-interest rate on a credit card is typically the best way to obtain an unsecured personal loan to consolidate debt.

Win against credit card companies with SoloSuit.

Pros and Cons of Unsecured Debt Consolidation

You might want to consider consolidating your debt with an unsecured loan (or a credit card) if you have multiple credit cards that you haven't paid off. This is your best chance of combining them into one bill and having something like 15 months to pay them off without interest.

The main risk that comes with debt consolidation on an unsecured loan is that other than a credit card, it may be impossible to get without great credit. Overall you may dig yourself deeper into a hole that you cannot get out of.

Make a Plan to Tackle Debt Consolidation

Debt is something many people struggle with. But the only way to get out of debt is to make a plan. Decide on whether debt consolidation, debt settlement, or another method is the best way out of your situation. Be sure to do your research, and in the end, you should come to a solution that is right for you.

What is SoloSuit?

SoloSuit makes it easy to respond to a debt collection lawsuit.

How it works: SoloSuit is a step-by-step web-app that asks you all the necessary questions to complete your answer. Upon completion, you can either print the completed forms and mail in the hard copies to the courts or you can pay SoloSuit to file it for you and to have an attorney review the document.

Respond with SoloSuit

"First time getting sued by a debt collector and I was searching all over YouTube and ran across SoloSuit, so I decided to buy their services with their attorney reviewed documentation which cost extra but it was well worth it! SoloSuit sent the documentation to the parties and to the court which saved me time from having to go to court and in a few weeks the case got dismissed!" – James

Get Started

>>Read the FastCompany article: Debt Lawsuits Are Complicated: This Website Makes Them Simpler To Navigate

>>Read the NPR story on SoloSuit: A Student Solution To Give Utah Debtors A Fighting Chance

How to Answer a Summons for Debt Collection Guides for Other States

Here's a list of guides for other states.

All 50 states.

Guides on How to Beat Every Debt Collector

Being sued by a different debt collector? We're making guides on how to beat each one.

Win Against Credit Card Companies

Is your credit card company suing you? Learn how you can beat each one.

Going to Court for Credit Card Debt — Key Tips

How to Negotiate Credit Card Debts

How to Settle a Credit Card Debt Lawsuit — Ultimate Guide

Get Answers to These FAQs

Need more info on statutes of limitations? Read our 50-state guide.

Why do debt collectors block their phone numbers?

How long do debt collectors take to respond to debt validation letters?

What are the biggest debt collector companies in the US?

Is Zombie Debt Still a Problem in 2019?

SoloSuit FAQ

If a car is repossessed, do I still owe the debt?

Is Portfolio Recovery Associates Legit?

Is There a Judgment Against Me Without my Knowledge?

Should I File Bankruptcy Before or After a Judgment?

What is a default judgment?— What do I do?

Summoned to Court for Medical Bills — What Do I Do?

What Happens If Someone Sues You and You Have No Money?

What Happens If You Never Answer Debt Collectors?

What Happens When a Debt Is Sold to a Collection Agency

What is a Stipulated Judgment?

What is the Deadline for a Defendant's Answer to Avoid a Default Judgment?

Can a Judgement Creditor Take my Car?

Can I Settle a Debt After Being Served?

Can I Stop Wage Garnishment?

Can You Appeal a Default Judgement?

Do I Need a Debt Collection Defense Attorney?

Do I Need a Payday Loans Lawyer?

Do student loans go away after 7 years? — Student Loan Debt Guide

Am I Responsible for My Spouse's Medical Debt?

Should I Marry Someone With Debt?

Can a Debt Collector Leave a Voicemail?

How Does Debt Assignment Work?

What Happens If a Defendant Does Not Pay a Judgment?

How Does Debt Assignment Work?

Can You Serve Someone with a Collections Lawsuit at Their Work?

What Is a Warrant in Debt?

How Many Times Can a Judgment be Renewed in Oklahoma?

Learn More With These Additional Resources:

Need help managing your finances? Check out these resources.

How to Make a Debt Validation Letter - The Ultimate Guide

How to Make a Motion to Compel Arbitration Without an Attorney

How to Stop Wage Garnishment — Everything You Need to Know

How to File an FDCPA Complaint Against Your Debt Collector (Ultimate Guide)

Defending Yourself in Court Against a Debt Collector

Tips on you can to file an FDCPA lawsuit against a debt collection agency

Advice on how to answer a summons for debt collection.

Effective strategies for how to get back on track after a debt lawsuit

New Hampshire Statute of Limitations on Debt

Sample Cease and Desist Letter Against Debt Collectors

The Ultimate Guide to Responding to a Debt Collection Lawsuit in Utah

West Virginia Statute of Limitations on Debt

What debt collectors cannot do — FDCPA explained

Defending Yourself in Court Against Debt Collector

How to Liquidate Debt

Arkansas Statute of Limitations on Debt

You're Drowning in Debt — Here's How to Swim

Help! I'm Being Sued by My Debt Collector

How to Make a Motion to Vacate Judgment

How to Answer Summons for Debt Collection in Vermont

North Dakota Statute of Limitations on Debt

ClearPoint Debt Management Review

Indiana Statute of Limitations on Debt

Oregon Eviction Laws - What They Say

CuraDebt Debt Settlement Review

How to Write a Re-Aging Debt Letter