Debt consolidation. Bill consolidation. Credit consolidation. All these terms refer to a financial strategy whereby a person decides to take out a loan from one lender and payout all the other debts, bills, or credits from different lenders. It leaves you repaying only that single loan at a lower interest.
Many Americans have embraced debt consolidation; according to Globenewswire, it has resulted in an improvement in the credit scores for the users. So, should you also consider debt consolidation?
To make this decision, you must dive into the deets of debt consolidation.
- What are the pros and cons?
- Is it right for you?
- Should you get a debt consolidation plan or come up with a debt repayment plan by yourself?
Let’s dive into the pros and cons to help you make an informed decision.
- One monthly repayment instead of many
With debt consolidation, you only have one loan to repay every month. It’s easier to budget for just a single loan instead of juggling between several loans.
When one has multiple loans, the primary question is, do I repay the smallest loan as I work my way to the biggest loan (Snowballing method), or do I repay the loan with the highest interest (Avalanche method)?
But, with a single loan, this isn’t a question. It’s easy to plan your monthly budget since you know exactly how much you’re supposed to pay off each month.
- Lower interest rate
Debt consolidation comes with a lower interest rate. This means that you can make smaller monthly repayments, thereby increasing your monthly cash flow. The increased monthly cash flow can help you live a decent life without depending on debt or relying on credit cards.
- It lifts your anxiety
Debt can really make you feel like you’re drowning, especially if the debts keep rising. A debt consolidation plan gives you peace of mind, knowing that you now have a plan. A plan to pay one monthly payment to one source every single month to offset your bills.
- Might increase your credit score
Taking out a debt consolidation plan and paying off your monthly repayments will eventually lead to an increased score. It demonstrates your ability to take out a loan and repay the loan diligently. This has a positive impact on your credit report.
- You incur a fee to move your debt from different lenders to one
When you’re moving your debt during debt consolidation, you might end up incurring a fee to move the loans — the money you could have used to settle your bills or repay your interest for the month.
- The compounded interest over time is higher
With a lower interest rate, you often get an extended repayment period. The longer repayment period means that over time, the amount of money you’ll pay is more.
- Increased risk
What are the chances that after a couple of years, there will be an emergency or emergencies that will affect your ability to prepay the loan consistently?
Today, your financial situation might enable you to make a particular repayment every month. But, if after a few years you get a divorce, an accident or something tragic happens that grossly affects your financial situation, will you still manage to make the repayments?
- Double debt
If you get your debt consolidated, but for some reason, you start using your credit cards again, you might end up with double debt: the consolidated debt and the credit card debt. This negates the reason why you went for a debt consolidation plan in the first place.
- Debt consolidation isn’t paying off your loans
Unlike what many people think, debt consolidation isn’t paying off a single penny of your loans: it’s moving your loan. It doesn’t reduce your principal amount. If you continue with your negative spending habits, failing to control your need for immediate gratification, debt consolidation will not solve your debt issues. It will only make you feel good for a few months.
- If the terms being offered by the consolidation program seem too good to be true, be extra cautious. Get an expert to examine the offer before you jump in.
- If the interest rate you’re getting to consolidate your loans isn’t lower than the interest rate on all your credit cards and loans, then it does you no good to consolidate the loans.
- Once you consolidate the credit card debt, you have to be ready to stop using the credit cards.
In conclusion, debt consolidation can and is helping millions of people deal with debt and improve their credit score. But is it right for you?