Pros & Cons of Debt Consolidation
It’s important to be aware of the pros and cons before you take on new debt.
Debit or credit card consolidation involves taking out a new loan to pay off multiple debts or credit card balances. The advantages? It can save you money or help you pay off the debt sooner when you borrow money at a low-interest rate to pay off loans or credit cards at a higher interest rate.
Other pros include having fewer payments to take care of each month, and less likelihood that you’ll be late on payments.
Cons: debt consolidation
The possibility of ending up paying more
You will rarely hear about the disadvantages of debt consolidation. It’s possible you can end up paying more in interest over the life of the loan, or that you’ll end up more deeply in debt, depending on the terms of your new loan.
It’s important to seek debt consolidation advice from a trusted financial professional before you agree to a debt consolidation arrangement.
The possibility of getting scammed
Be extremely careful and do thorough research on the credit provider you choose to assist you with consolidating your debt.
There are stories of scam artists claiming to be credit providers letting clients pay them only to find out later that they never cleared off the debt from their names and found themselves deeper in trouble.
When debt consolidation isn't worth it
Consolidation isn’t a silver bullet for debt problems. It is not a quick fix for excessive spending habits that create debt in the first place.
It’s also not the best solution if you’re overwhelmed by debt and have no hope of paying it off even with reduced payments.
It is not worth it if your debt load is very small as you can pay it off within six months to a year at your current pace.
TIP: Try a do-it-yourself debt payoff method instead, such as the debt snowball or debt avalanche.
If the total of your debts is more than half your income, and a calculator reveals that debt consolidation is not your best option, you’re better off seeking debt relief than treading water.
Future employment
Some employers might not accept your job application if you consolidated your debt.
Pros: debt consolidation
Getting out of debt
If you stick to the plan and you resist the temptation of taking on additional debt once your credit score looks better, you will be able to successfully get out of debt and improve your credit score, finances, and lifestyle.
Combine several creditors
Each creditor has its terms, fees, and interest rates. Managing each creditor on its own when you start to fall short and struggle to make payments can get very tough, hence why a consolidation loan is so liberating as it will allow you to make a new loan to pay off all your creditors and only focus on one loan, which means one interest rate, and not dealing with multiple terms and fees.
Reduce stress levels
It can be extremely stressful to have incoming calls all day long from creditors hunting you down for payment, your mental health might be at risk here.
Making a wiser decision and approaching your debt from the right angle can have really good results in terms of your well-being and mental health. Stress is ultimately the cause of most diseases.
Save Money
One monthly repayment at a favourable interest rate is much more affordable than several payments with varying interest rates. This could help you to save some money and even pay off your debt faster as you have more available to pay towards it. This is the part where you have to be strong and have good self-control.
TIP: Always compare interest rates when taking out a consolidation loan.
Settling several debts
A consolidation loan enables you to settle several outstanding debts and only focuses on one loan to pay. This makes it easy to manage and is a very effective way of improving your financial situation. Your credit score will improve when paying off several debts and you will have to resist the temptation of taking on more debt.