Pros and Cons of Debt Consolidation

Some days I feel like I need a personal accountant.  Not only to do my taxes for me every year (which would be great), but also to pay my every day bills.  I have started tracking all my bills using Outlook, which has helped me get a tad more organized… a tad more.  Lately, I’ve been thinking about exploring debt consolidation as an option to make my bill paying easier and help reduce my monthly payments.  I thought I would share what I have learned.

First off, what is debt consolidation?  Basically, a consolidation loan is a type of loan into which multiple loans have been combined and reestablished as one loan. You can accomplish this by transferring multiple credit card debts to one credit card with a lower interest rate, taking out a home equity loan, a home equity line of credit, tapping into your retirement or taking out a consolidation loan.

Debt Consolidation Cons

Let’s get the negatives out of the way first. 

  • It’s not a magical solution.  WHAT??  Consolidation may not save you money or lower your monthly payment.
  • You may have to pay exit fees to get out of existing loans.  Check with your current lenders to see if this applies to your loans.
  • It may cost more.  If the length of time to pay off the debt is extended, you'll spend more money in interest over a longer period of time in order to pay off the debts.
  • Savings may be temporary.  In the case of credit card balance transfers, typically the lower interest rate is temporary and may last for only 12-18 months.

Debt Consolidation Pros

Now for the positives. 

  • Lower interest rates.  If you have high interest rates on a credit card or installment loan, consolidating to a lower interest rate will help to save you money.
  • Convenience.  Consolidating your credit cards and loans into one monthly payment will make bill paying much easier and more convenient.  This could possibly eliminate late fees if you struggle to make payments on time.
  • Lower monthly payments.  If you have been struggling to make your monthly payments, this may be a great way to reduce payments with your lower interest rate.

 Something to keep in mind is that debt consolidation doesn’t get you out of debt.  You still have to pay what you owe.  It also doesn’t solve any of the problems that may have got you into debt in the first place.  Do you spend too much?  Did you have a reduction in income?  Did you have any expenses that you were not planning for? 

Whatever may have been the cause, your main goal should be changing the behaviors that got you into debt in the first place.  Debt consolidation along with some budget work could be a good way to get you on the right path.  Make sure to consider both the pros and cons, and possibly speak with a financial counselor before making your final decision.

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