Debt Consolidation - The Good And The Bad Of Debt Consolidation

The first thing to take into account is if a debt consolidation loan is in your best interest. It should give you overall savings and not just a short term quick fix. You should take your time and shop around to find the best solution for your individual needs

But are consolidation loans a good idea? Let us look at some advantages and disadvantages.

Advantages

Single payment
Instead of having to make multiple payments, you only have to manage a single payment. You do not have to run around each and every month stressing about paying your creditors on time. This will simplify your finances and your life and you will have more time to spend with family and friends.

Lower interest rates
In most cases a consolidation loan is a secured loan, also called a second mortgage. Your home is offered as security and therefore lenders are prepared to offer a much lower interest rate as opposed to an unsecured loan.

Credit cards are unsecured loans and since the risk to the lender is much higher the interest rates on such a loan is also high.

Lower administration fees
If you add up all the monthly charges for your credit card, personal loans, store cards, overdraft, HP installments etc. it can turn out to be a substantial amount you are paying to your creditors.
But with a debt consolidation loan you will only have one creditor to pay and save a lot of money on monthly fees.

Lower monthly payments
Your monthly repayment will be significantly lower since your interest rate is reduced and because you have one payment instead of many per month.
This will improve your cash flow which you can use in turn to pay off your new debt.

One creditor

You have the convenience of only dealing with one creditor. You can live a stress free life and it makes the management of your finances much easier

Disadvantages

Lower payments vs. lower costs
Often, borrowers look for lower payments instead of lower costs. Lower payments can be due to the fact that your loan is spread over a longer period and ultimately it increases the total cost of your debt.

Easy to pile up more debt
With a debt consolidation loan, you basically transfer your debt from one company to another. Although your credit card has been paid off, it doesn't mean that you are debt free. Many debtors forget this fact and may be tempted to start using their credit cards again. You could end up in a worse situation than before.

Does not change spending habits
A debt consolidation loan does not mean that everything is plain sailing from now one. You must be disciplined enough to change those spending habits that got you in trouble in the first place.
But, if you still keep your regular spending habit, then not only are you in debt again, but that debt is on top of your debt consolidation loan.

May take longer to pay off
Since most debt consolidation loans are secured through a mortgage it can take up to 20 years to pay off. It is one of the biggest mistakes you can make to stretch your repayments over such a long period.

You can lose your home.
If you cannot pay back the loan, you could end up losing your home. If you decide on a consolidation loan it is important to stay within your affordability range and build up a reserve for unforeseen events.