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Debt Consolidation - Advantages and Disadvantages

Do you have mounting credit card debts or a number of different loans to pay off?

If you do, then debt consolidation is an option you can consider to make the process of debt repayment quicker and easier.

To consolidate the debt, you take a single loan to repay all existing debt.

It has its merits and demerits, and the decision depends on evaluating these factors in light of your financial and personal situation.

A few advantages and disadvantages of this debt reduction method are discussed here to help you make an informed decision.

Advantages of consolidating your debt

Low interest rates:

A major advantage of consolidating your debt is that you can reduce the rate of interest on your outstanding debts by negotiating with creditors.

It would be a good idea to seek the services of a debt consolidation firm as they take care of the negotiations for you.

With lower interest rates not only will you be able to afford the monthly payment, but also save a bit of money every month.

One payment:

When you consolidate your debt, you are required to make one payment on a monthly basis to the consolidation firm. This is an easier, time-saving and more comfortable way of paying off debt as compared to paying different creditors each month.

Waiver on late fees:

If you fail to pay your different debts on time, late fees are charged by the creditors. Under a consolidation program, you can sometimes get a waiver on late fees.

Repayment plan:

The consolidation company and your creditors chalk out a repayment plan such that you do not default on your loan. This way you don't have to spend time on planning how to pay off all the different debts.

Improve credit score:

Defaulting on monthly payments or late payments can negatively affect your credit score. When you consolidate your debt and start making regular payments, you get a chance to improve your credit score.

Debt consolidation companies generally provide free counseling to those who want to consolidate their debt. Based on your financial situation, they will advise you on the repayment plan and procedure that best suit your needs.

Disadvantages of consolidating your debt

Risk of losing assets:

The loan you take out during consolidation is a secured loan provided against collateral such as your house or car. Failure to pay monthly installments will cost you your valuable assets.

A proper analysis is necessary before you decide to consolidate your loans.

Create more debt:

Another disadvantage of consolidating your debt is that you can become lax about your finances now that you are successfully making a single monthly payment and probably saving some cash too.

This may tempt you to start using your credit cards once again and increase chances of building up more debt.

Difficulty in finding low interest rates:

Consolidating all your debt into one may not be of much use if you are not successful in negotiating lower interest rates with your creditors.

In such a case, you will be better off making individual payments.

Getting out of debt is easy if you go about the repayment process with a solid plan and the determination to make all monthly payments on time.

Debt consolidation gives you the opportunity to manage debts better, saving you from anxiety and hassle.

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Balloon Payment.:
A large loan repayment made in order to clear a debt. Usually applied to a short-term fixed-rate loan, which involves small payments for a certain period of time with one large payment for the remaining amount of the principal at a time specified in the future