Understanding the Pros and Cons of Debt Consolidation
Thinking that debt consolidation is a way out of your financial woes? When weighing the pros and cons, you must maintain your focus on your goal of becoming debt-free. Too many times, consumers incorrectly believe that their lower monthly payment on the bad debt means that they are paying less. In reality, many people who obtain a debt consolidation loan pay more money in the long run, due to the long shelf life of the loan. Basically, you are trading future cash in your pocket for smaller monthly payments today.
Pros of consolidating your loans
- Eliminates penalties and interest that has accrued from delinquency.
- Combines many payments into a single (usually lower) monthly payment for all your debts.
- Stops collection calls and harassment (or, you can refer these calls to your debt consolidation agency)
- Capitalize on tax benefits for home equity loans.
- Avoids the need to declare bankruptcy.
The above list seems to make debt consolidation a perfect, “fairy godmother” type solution to your problems. However, consolidation is a double-edged sword. You must be aware of the pitfalls before making a decision.
Cons of consolidating your loans
- Lack of discipline and unwise spending habits could return, putting you further into debt.
- Possibility of losing your current credit cards, depending on the plan (this may be a pro!)
- The term of repayment on consolidation loans tend to be longer.
- More money paid as interest because it is over an extended period of time.
- Losing your home is possible when using it as collateral, if the loan defaults.
- Consolidating your debt is recorded on your credit report. Though the credit bureaus say this does not affect your score, this information will be seen as red flags to loan officers.
Consolidating your debts may be a worthwhile “band aid” solution, but only if you change your financial habits and remain disciplined enough to not incur new debt. Many people deny they have a problem, and talking to a professional debt consolidator is the first step towards realizing where your finances stand. There are many programs and services that are available, both in your neighborhood and online. Simply fill out your information, and debt consolidation specialists will call you to discuss your options. Do not take any action until you fully understand their services and terms, paying close attention to the fees involved. Trust the wrong company, and you can find yourself in even bigger trouble. Be aware of their upfront fees and how much money they actually send to your creditors.
You could also look into debt management plans and credit counseling services to view all your options. Whatever action you take, choose wisely and with the knowledge of where your cash is going.
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