Pros and Cons of Debt Consolidation

debt consolidation pros and consWhat do you know about debt consolidation? If you have a lot of debt, there is a good chance that you have been thinking about consolidation and what it can do for you. Before you do anything, keep this in mind: there are both pros and cons of debt consolidation. While you may think that this is the right move for you, once you realize the potential drawbacks you may change your position. From television commercials to Internet advertisements, you have probably come across several companies that specialize in debt consolidation. The problem with these advertising spots is that they only talk about the benefits. Unfortunately, this has tricked many people into consolidation when it was not the best decision for them.

Debt Consolidation Benefits

1. From multiple payments to one. When you consolidate your debt, you are taking multiple payments and putting them into one. In turn, it is much easier to stay organized. Along with this, you no longer have to decide who should get paid first and how much you should send each creditor.

2. Lower interest rate. How much money are you paying out in interest every month? If you have a lot of debt, spread across several loans and/or credit cards, you may be paying hundreds or maybe even thousands in finance charges. When you lump together your debt you are only going to pay interest on one loan and often times receive a lower rate. In turn, you will be able to save yourself a lot of money right off the bat.

3. Lower monthly payments. If you have been struggling to pay your debt, month after month, you are probably interested in lowering your payments no matter what it takes. Since you will only have one payment and one interest rate that is lower, your monthly payout is going to be much less.

Debt Consolidation Drawbacks

1. The potential for more debt if you are not careful. Since you will be freeing up money, you will have more to spend. Smart consumers either save this money or put extra towards their debt. Unfortunately, there are many who use this “leftover” money to get into further debt. From here, the cycle starts over and you will find yourself in a bad spot once again.

2. You may spend more in the long run. Even though your interest rate may be lower, it is possible that it will take you a longer period of time to pay back your debt. In turn, the amount that you pay in interest may turn out to be greater. To avoid this, you need to stay organized and pay off the debt as quickly as you can.

Note: This detail is the one that debt consolidation companies will try to hide from consumers at all costs.

3. You can lose a lot. For instance, a home equity loan that you are using to consolidate debt. While this is a great idea on the surface, if you do not stay on schedule with your payments your house is in the line of fire. With secured debt, you always have to worry about what will happen if you cannot make your payment. On the other hand, with unsecured debt, such as a credit card, the worst that can happen is that your rating and score will take a hit.

4. It could ruin your credit. Some debt consolidation companies claim to be debt settlement negotiators as well, and if you’re paying them a lump sum amount, they may be holding that money and intentionally becoming delinquent on your debts to try to have leverage to negotiate a lower settlement on the debt repayment later. This is going to ruin your credit history and credit score.

5. It doesn’t solve the problem, only the symptoms. Debt consolidation doesn’t get you out of debt, and it doesn’t tackle the issue of how you got so far into debt in the first place. Do you have an income problem? Do you have a spending problem? Or did you merely have a huge unexpected expense that you weren’t financially prepared for? Whatever it is, you need to change the behaviors that got you into debt before you devise a plan to get out of debt or else you’ll find yourself back in the same predicament a few years later.

Don’t be fooled into thinking that debt consolidation is right for everybody. Before you make a final decision, consider the pros and cons detailed above and speak with a financial counselor with the heart of a teacher to see if debt consolidation is right for your situation. If you get serious about paying off your debt, then you can probably get the ball rolling quickly enough to pay off the some of the smaller debts first without consolidating your debt.

(photo credit: debtconsolidation)