Consolidation of Debts - Good Idea?
Consolidation of Debts - Good Idea?
Debt consolidation refers to taking out one large loan to pay off all of your smaller loans such as credit card debt. Like all financial maneuvers to get out of debt quickly, this one has its pros and cons.
One pro is that once your debt is consolidated, you will only have to be responsible for keeping track of one payment instead of several. You will also be dealing with only one creditor, which can make paperwork and communication much easier.
Another pro is that often your monthly payment on the consolidated loan will be lower than it was when you were trying to pay off several debts. This can be a huge benefit if you were struggling to make all the minimum payments.
Finally, in many cases, your interest rate on the consolidated loan will be lower than the interest rates you were paying on credit cards when you had multiple debts. This can save you money in the long run, especially if you make paying off your debt a priority and pay more than the minimum payment each month.
But the picture of loan consolidation is not all sunshine and roses. If you can afford to make only the minimum payment on your consolidated loan, it will take you years to pay it off. So, even if the interest rate is lower, you may still end up spending more money in the long run.
Another con of debt consolidation is that it is at best a short term solution. It can't fix long term problems like compulsive spending or simply needing more money than you are bringing in. In fact, what often happens when people consolidate their debts is that they then go on to run up their credit cards again, incurring more debt. The end result? You owe more money than ever before.
Finally, depending on how you consolidate your debt, you could be putting your lifestyle at serious risk. Many people
consolidate their debts by taking out a second mortgage on their homes. This means that the home is collateral--something the creditors can take if the loan isn't paid. Imagine how awful it would be to lose your home and still be facing an enormous debt.
Although it has its positive points, then, debt consolidation should not be viewed as a magic cure-all. In most cases, it isn't even a very good idea.
Consolidation of Debts - Good Idea?
By: Jo Townsend
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