The Ins and Outs of Debt Consolidation

Consolidating all of your Debts is Tempting, but is it Worth it?

“Consolidate with us and we’ll reduce your credit card payments to 0%!”
“By consolidating your debt you’ll wipe out your credit debt permanently!”
“Trust us, we’ll negotiate with your creditors and get you out of debt!”

Consolidating your debt means that all of your existing debts and accounts – including your credit card debt, student loans, car loans, mortgages, personal lines of credit and other personal loans –will be placed under one lower-interest loan with one handy monthly payment.

The concept behind consolidating your loans is, especially for those that have been in debt or have trouble paying off debt, will be easier to organize and maintain regular, stable monthly payments. A consolidating loan will typically have you paying all of your various debts off at once - with lower monthly payments. Because you are paying a larger principle balance (all of your debts under one bulk payment), you end up paying less interest on a consolidated loan. Thanks to the lower interest you can use the extra money you save and pay off your debt more quickly.

Ok, so you’re sold on debt consolidating right?

Well, not so fast! It’s not quite as simple as it sounds. As with anything in life, debt consolidation has its plusses and negatives. So before you sign up to have all of your debt paid off in one bulk monthly payment let’s look at the pros and cons of debt consolidation…

Pros of debt consolidation

Reduction in monthly payments - The biggest plus of consolidating your debt is that even though you end up paying one lump sum that covers all of your loan payments at once – that one lump payment is typically lower then paying all of your loans separately.

Extra money in savings - Because your monthly payments are reduced, you actually end up with extra money you can opt to put on the balance of the loan to pay it off faster. The question is – will you have the discipline to do it?

One payment is easier to keep track off – with consolidated loans you end up making a payment just once a month. Many times the thing that gets borrowers in trouble in the first place is multiple loan payments coming out of their bank account various times during a month. Or if they are actually responsible for making the payment themselves – either online or via sending a check – the payment due date may be missed or forgotten all together. There is no doubt that it’s easier to manage one lump loan payment rather then multiple loan payments all with different due dates.

One lender – The same can be said for creditors – it’s much easier to handle a payment from one lender then to negotiate and deal with payments to multiple creditors.

Lower interest rates – Another big plus of consolidated loans is that the interest rates tend to be lower because you’re making efforts to pay off the balances of all outstanding debts. This will boost your credit worthiness in the eyes of potential lenders, and it may even help improve your credit score over time.

Cons of debt consolidation

It may send you into deeper debt – Remember debt consolidation is not credit counseling or therapy – you still are expected to make full monthly payments. However making one monthly payment when you used to have to make multiple monthly payments may be the excuse you need to go out and get more credit. If you have poor willpower when it comes to credit, make sure to go out and get credit counseling. If the debt consolidation is part of your counseling great – but don’t expect it to solve your bad credit habits.

Larger debt balance means longer term loan – When it comes to a debt or a say a car loan, many people don’t realize how long their loan actually is – they just look at their monthly payment amount. Remember, even though a consolidated loan may offer better repayment options (one convenient monthly payment instead of multiple) and lower interest rates – you are actually paying into a loan over a longer term – so you may actually be paying as much interest in the long run.

Your loan will take longer to pay off – As mention above, a consolidated debt mean that all of your debts will be compounded into one debt, with one lower interest rate – however the term of the loan is longer, so overall you will be paying the one large balance off longer than you would multiple lower term loans.

One interest rate – Sure it sounds more convenient, but you do pay for that convenience, believe me. Remember while it’s convenient to pay off all of your loans in one large payment, you could have paid off your smaller loans with higher-interest rates first, and saved the loans with the lower interest rates (typically a rate that’s lower than your consolidated option) last. With a consolidated loan you don’t have that option.

Debt consolidation pirates – I know it’s not nice to call a company pirates or scoundrels, but debt consolidation is a money making business and not all are looking to help you out. Before signing on for debt consolidation:

• Do your homework – understand what debt consolidation entails.
• Check with at least 3 different debt consolidators to find out which offers the best lender agreement.
• Shop around for the lowest interest rate.
• Get a handle on your personal finances – to see if you can do it on your own first without debt consolidation.
• Ask yourself is debt consolidation a short-term remedy or working towards a long-term solution?