The Pros and Cons of Debt Consolidation.
The most common form of debt consolidation involves applying for a debt consolidation loan. A debt consolidation loan condenses all of your monthly payments into one bill. Debt consolidation should not be confused with bankruptcy, in which all debts are cancelled and your credit rating plummets. Debt consolidation is more akin to refinancing, in which old loans are reviewed and renewed, only under more favorable terms.
Sounds rosy enough, but before you decide to consolidate your debts, take the time to weigh carefully some of the pros and cons.
1) Simplified money management. Rather than paying a dozen or more bills each month, debt consolidation allows you to make a single payment that encompasses all of your debts. Clearly, this is a big pro in favor of debt consolidation. Who doesn’t know the feeling of anxiety as bills begin to pour in? There are credit card bills, utility bills, medical bills, car loans, student loans, gas cards, and any combination of late or overdraft fees that you may have accumulated. It’s enough to make anyone’s head spin! The idea of having all these debts condensed into one simple monthly bill is very attractive indeed.
2) Lower monthly payments. Obviously, of you must only pay one bill a month, your monthly payment will automatically be lower than it was before. Thus, you will be granted substantial relief in your monthly spending.
3) Reduced Interest Rate. A debt consolidation loan will generally come with a lower interest rate than you were paying on your credit cards.
4) Relief from creditors. The peace gained from not having to deal with creditors is a welcome refuge for anyone who has experienced the anxiety of being sought by creditors.
1) Your debt—all of it—still exists. Some people get the idea that debt is somehow lessened simply by the act of consolidating it. This is simply not true. By consolidating your debt, you are merely adding it all together and condensing it into one large loan.
2) You will probably take longer to pay off debts. Because debt consolidation usually minimizes your required monthly payment, you can expect it will take longer to pay off your debts entirely.
3) You will probably pay more in the long run. Again, those comfortable monthly payments mean that your debt is being stretched over time. Expect to pay more over time, as finance charges on interest rates add up quickly.
4) Debt consolidation may encourage a false sense of security. Having your debt consolidated may create the sense that your debt is under control. This false sense of security is dangerous because it could lead you to overextending yourself again. Some argue that debt consolidation treats the symptoms of the problem.
After weighing carefully the pros and cons of consolidation, if you do decide to apply for a debt consolidation loan, you should know that the type of consolidation loan you qualify for will depend on various factors. Some of the factors lending institutions consider in deciding whether to approve you for a debt consolidation loan include whether you have an adequate credit rating, if you hold some sort of equity, and whether you have a consistent income source.
Shop around to find a lender who will offer you the best consolidation loan for your specific situation. Loans vary widely in length, interest rate, amount loaned, and the type of interest rate (fixed or adjustable). The interest paid on these loans is usually secured by equity on a property, such as your home.
Another form of debt consolidation involves the use of credit counseling services. Credit counseling services help individuals regain control over their finances by helping them reduce their debt in various ways. These services often serve as an intermediary between you and the company you owe money to. Credit counseling services can intervene on your behalf, often convincing companies to reduce interest rates and cancel fees. Credit counseling services can also help teach you important money management skills.
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