However, it is not always the best solution for everybody. Understanding the benefits and potential traps of consolidation will help you decide whether it is right for you.
Benefits of Debt Consolidation
Keeping track of several payment amounts with different deadlines can be overwhelming. You are more likely to miss a deadline when juggling multiple payments and due dates. Unfortunately, one missed payment can cost you by way of penalties and late fees. More than three missed payments and it will get reported to the credit bureaus, damaging your credit. Consolidating several debts into one loan simplifies the payment process because you now have only one payment to keep track of.
Consolidating your debts also allows you to replace higher-interest debts with a lower interest rate loan. There is one caveat to this however. You must have a good score to qualify for the lower rate of interest on your consolidated loan.
When you consolidate your debts, you can choose a payment schedule that suits your financial circumstances. Choosing a longer term with smaller monthly payments can help if you’re struggling to meet your current monetary obligations. Choosing a shorter term will increase your monthly payments but it will also help clear your debt faster.
Downsides of Debt Consolidation
You will lose the benefits and special provisions such as rebates and interest rate discounts associated with your older loans. The consolidated loan is considered as a completely new loan with none of the earlier benefits.
While extending the loan term may offer short-term relief, you will pay more over the life of the loan. This is because of the additional accrued interest for the extended term. Increasing the loan term can also promote unhealthy financial habits as it can fool you into thinking you have extra money to spend.
Is Consolidation Right For You?
It may be right for you if you are struggling to keep track of your monthly payments. Keeping track of one payment amount and due date minimizes the likelihood of missed payments, penalties, and damaged credit. However, you must make sure that your monthly cash flow is enough to cover the payment towards your debt.
Most important of all, it only makes sense to consolidate if you qualify for a lower rate of interest.
Before you choose to consolidate, take another look at the benefits and special provisions associated with your old loans. Is it worth losing those benefits and provisions? Speak to a financial advisor if you’re not sure about the implications.
Pay Attention to the New Details
Last but not least, take time to read the terms and conditions of the new loan. Also, ask the lender to give you a detailed breakdown of all the costs involved in the process.
Consolidation is a great way to manage debt but it does have its downsides. Understanding what’s involved and the pros and cons of consolidation is key to making a decision that’s right for you.
Be sure to check out our reviews of the best consolidation companies.
