Pros and Cons of Debt Consolidation

Before you start reading, please enter your email to follow Slim Fit Wallet. Following helps me to spread awareness about the benefits of living debt free to more people and give you useful content in return. If you are already part of the squad on WordPress, follow on Twitter – @Slimfitwallet.

If you are tired of being crushed by debt, you may be considering debt consolidation. Consolidation sounds like a way to wash away debt fast, but it is not. Before you decide to consolidate your debt, read about the pros and cons, and check out some alternatives below.

What is debt consolidation?

Debt consolidation is the process of combining all your debts into one debt consolidation loan.

Pro: More Favorable Terms

If you are seriously considering debt consolidation, you should only do it when the new loan has more favorable pay off terms: a lower interest rate, lower monthly payment, or both. You must do your homework and seek out a consolidation plan that offers these benefits. Do the math and read the terms.

Pro: One Monthly Payment

One new consolidated loan will leave you with only one monthly payment to one leader instead of several payments to each lender.

Con: The Benefits Usually Have a Catch

While one payment sounds appealing, it is often attained by lengthening your repayment period. You will ultimately end up paying on your debt longer than if you had left your debt unconsolidated. The longer repayment period also means you will also pay more interest on your debt.

Con: Debt Consolidation Does Not Reduce Your Debt

Debt consolidation sounds appealing because it will make you feel like your debt burden has been lifted. However, it is important to remember that you still have the same amount of debt as before. Now, instead of having multiple accounts to pay, you have just one.

Con: Forfeit Incentives

When the debts are combined into one, the lender often forfeits the incentives offered by the original lender. This mostly applies to federal student loans. For example, incentives such as interest rate reduction for signing up for auto pay is forfeited when a debt is consolidated.

Instead of consolidating debt, there are some alternatives worth checking out.

Debt Snowball Method: Get on a budget and create a plan to attack the debt on your own. Once your budget is set, use the debt snowball method. The debt snowball is a repayment method where all debts are ranked by balance (regardless of interest rate).  Minimum payments are made on all debts except the one with the smallest balance.  You attack that debt with an additional payment each month until the balance is paid in full.  Once it is paid off, the money is rolled into the next debt with the smallest balance. Here’s an example.

Debt Settlement: If you are in default on your debt, you should contact the lender to negotiate a plan to settle the debt. Debt settlement is a negotiation strategy where you pay your creditors a fraction of the outstanding debt to satisfy the account. It’s safer to do this on your own without the help of a company. Be sure to get the settlement in writing and never give the company electronic access to your banking accounts.

Source

Thanks for reading!