Pros and cons of debt consolidation
If you have multiple simultaneously-active debt plans, you might want to consider the idea of debt consolidation. Whether you are experiencing a major financial crunch or simply wish to manage your finances in a better way, debt consolidation can seem like an ideal resolution to all your budget related problems. But is it really worth the risk? Read on for the major advantages and disadvantages that come along with debt consolidation and how they might impact your overall financial health.
Debt Consolidation Pros
The first and foremost benefit of debt consolidation is that it lets you organize your multiple liabilities into one portfolio, which is both easy to manage and repay.
Considering the different debt plans that you have to repay, you might be paying a hefty amount solely in the form of interest contribution towards each one of them. However, consolidating the various plans into one single debt will ensure that you pay interest only on one loan, which typically has a lower interest rate as compared to the separate plans.
Since you will now be paying one single installment every month, it will be less of a financial burden on you as compared to the combined repayment amounts of the separate loans. Also, given the lower interest rate of the consolidated debt, your monthly installment will be smaller than before.
Debt consolidation Cons
Consolidating your debt can end up ruining your financial health further, by freeing up money that you can use for more mindless spending and get buried deeper in debt. It is therefore advisable to utilize this money to either make an investment or contribute a little extra each month towards your debt repayment.
Despite a lower interest rate, you might end up taking longer than before to pay off your debt. As a result you might have to pay more interest in the longer run as compared to that of the separate debts.
Some lenders or debt consolidation companies might require you to offer some kind of collateral such as a lien against your car or a second mortgage on your house. In the event that you are unable to repay your loan amount, you might eventually end up losing your prized assets and property.
The bottom-line is that Debt consolidation is merely an instrument to convert a current debt to a different debt. This implies that it is not exactly a fool proof solution for over indebted borrowers. If you really wish to manage your finances well and ease off your financial burden, you must make it a habit to spend less, save more and repay your debts on time with your own income.