What are the pros and cons of debt consolidation?
A legit question that’s on the mind of many people in debt.
Debt consolidation is a way to ‘combine’ multiple small debts into one single (and bigger) loan.
When attempting to consolidate debt, you’re looking to take out a loan big enough to cover your other smaller balances owed. Preferably, your new loan will have better terms than the smaller debts combined.
Paying off multiple debts that are difficult to handle separately sounds like every consumer’s dream!
You consolidate the amounts owed under better terms and it all looks like you’re starting off with a clean slate!
However, as much as debt consolidation sounds advantageous, there are some disadvantages you need to take into consideration as well.
Debt consolidation pros and cons
Advantages of debt consolidation
One lower monthly payment as opposed to many – Handling a single monthly payment, lower than the previous multiple installments summed up, is a great perk!
Lower interest rate – Debt consolidation loans should come with an overall lower interest rate, compared to your previous interest fees. This should make it easier for you to handle debt payments on a regular basis.
Budgeting becomes easier – Since you only have 1 debt payment to worry about, you can have an easier time budgeting your money, even on a low income. This makes allocating your income to your various budgeting categories a much easier task.
Lower chance for late payments – Closely related to having one payment to handle, a debt consolidation loan lowers the chances for you to miss a deadline! You can automate it to make sure your debt is being paid ON TIME.
Covering up old debts – Having really old debts you’re still in the process of paying can be a nightmare, especially when creditors are after you. Consolidating these old loans could help get rid of them.
Positive impact on your credit score – If you were having trouble paying more than 1 balance at a time, you’re probably used to missing payments. By regularly paying your consolidation loan, you could keep your credit score from dropping yet again!
Possible tax deduction – If your consolidation loan is secured, you may qualify for a tax deduction. This usually happens if you secured the loan with your home.
Disadvantages of debt consolidation
Paying more in interest over time – Most lenders argue a lower interest rate on your consolidation loan saves you money in the long run. However, depending on the life of your new loan, you might end up paying more in interest fees!
It takes longer to become debt free – While all the advantages presented earlier on sound great, they all come with a cost: it will probably take you a few years longer to become debt free!
Losing thousands in the long run – Paying more in interest over time, combined with more time to pay off the consolidation loan could mean you’re actually losing thousands! It may not seem like it, since you pay less each month at a low interest rate. But do the math before deciding to consolidate your debt and see for yourself!
You’re still in debt – Debt consolidation doesn’t magically erase your past debts. You’re literally still in debt! Depending on the amount, it could take years before you pay of this new loan.
You can always accumulate new debt – A common and real problem consumers often face is accumulating new debt. A consolidation loan might help you temporarily, but it doesn’t prevent you form getting into debt yet again! Spending money you now suddenly have available is a big no, no!
You can hurt your credit score – As previously mentioned, getting rid of old debts and showing consistency in paying this new consolidation loan should have a positive impact. However, you’ll probably see a negative impact on your score before that happens. Instantly reducing the debt-to-credit utilization ratio, combined with new debt generally equals a drop in your credit score.
Securing the loan might be dangerous – Obtaining a debt consolidation loan is much easier if you secure it. Usually, this is done using assets, such as you own home! If you’re not careful and fail to respect the loan’s terms, you might find yourself in a risky situation.
Debt consolidation can be a helpful solution for anyone looking to get out of a vicious debt circle and attempt to start fresh.
Before taking out yet another loan though, it’s important to weigh in the pros and cons!
It’s also important to remember, new debt is sill debt. And being in debt is not OK.
If you’re having trouble keeping up with paying your balance, you might need to work on your spending habits, rather than find a quick fix!
Have you ever taken out a debt consolidation loan?
How did it work out for you?