The pros and cons of debt consolidation remain one of the most misunderstood topics when seeking for debt relief programs.
Some say it is beneficial while others suggest avoiding them.
To clear things up, here are the effects of debt consolidation on your financial situation.
What are the Pros and Cons of Debt Consolidation?
1. What is Debt Consolidation?
Debt consolidation happens when you combine multiple debts into a single loan.
The main reason why people consolidate their debts is for convenience.
It allows you to deal with a single monthly payment instead of multiple payments which can be time-consuming and often leads to missed payments.
2. How Does It Work?
Consolidating your loans is a form of managing your debts.
It is a service offered by many debt settlement companies and anyone who has unsecured loans can enroll in this program.
Debt consolidation works by taking out a personal loan which settles all your qualified loans.
Your service provider will communicate with your creditors for the entire process and once all those debts are settled, you will only make one monthly payment to your service provider.
3. What are the Pros of a Debt Consolidation?
There are certainly pros and cons of debt consolidation, like any form of financial relief programs.
Here are the benefits of consolidating your loan:
- Convenience is the primary benefit of loan consolidation. It allows you to easily manage your time by eliminating multiple payments.
- Debt consolidation can also save you money. Your service provider may offer to reduce your debt or reverse some fees, which enables you to keep some savings in your pocket.
- It reduces financial stress. Individuals who have a multiple and huge amount of loans may suffer from anxiety of having too much to track every month. By making a single payment, it reduces their exposure to financial tensions.
4. What are the Cons of a Debt Consolidation?
- Be prepared to pay additional fees. Debt settlement companies may charge you 20-25% based on the final settlement amount and on top of that, any late payment fees, interest, and penalties will also be added to your loan.
- There is no guarantee that lenders will approve the settlement.
- The debt settlement process can be lengthy and generally takes 2 to 3 years.
5. Does Debt Consolidation Reduce My Loan Amount?
When you consolidate your debts, it does not give you a guarantee of saving money.
While debt consolidation does not officially reduce your loan, and you still have to pay the amount you owe, you can save some money by negotiating your interest rates.
These debt settlement companies are usually more forgiving on interest rate reductions.
6. How Does Debt Consolidation Affect Credit Score?
Debt consolidation affects your credit score in both negative and positive ways.
On one hand, debt consolidation allows you to open a new loan which increases your total debt, and if this activity causes to reach your credit limit, then your score will be affected even if your other debts and credit cards are settled.
On the other hand, you can improve your credit score by keeping your credit cards open after settlement.
Another way to help boost your credit is by making monthly payments on time and avoid missing your due dates.
7. When Is Debt Consolidation a Good or Bad Idea?
Before agreeing to consolidate your loan, debt settlement companies will need a proof that you can pay them off.
They will basically see if you have a stable source of income and have a good credit score.
These are the most common signs debt consolidation is good for you.
In contrast, it is a bad idea if you only see this option as a temporary escape of paying off your existing debts.
If you are the kind who can’t control his spending habits and will only use this opportunity to spend more, then debt consolidation is not the right strategy for you.
Are you considering consolidating your debts? Watch this video from CNN for more pros and cons:
Are you drowning underneath multiple debts?
Do you ever dream of being debt-free and able to spend your money on savings and vacations?
You can do it!
You just have to be responsible managing your finances and understanding your debts, it only takes patience but with the right discipline, you will surely get there.
Have you tried consolidating your loans? What do you think are the greatest pros and cons of debt consolidation? Share your thoughts with us in the comments section below!