Turning to Debt Consolidation

In the current economy, many people are struggling to manage their debt and loan payments. After extreme budgeting or even turning to loved ones for help, it may be time to look at your other options to help manage your debt and get your monthly payments under control.

Debt consolidation can be a great option when you have exhausted all other options available to you.  Before you resort to this option, it is important to understand what is involved and the financial impact it may have on your life.

What is debt consolidation?

For those who are just learning about this option, debt consolidation is the financial process which combines several unsecured debts such as personal loans or credit card debt into a single loan that requires one monthly payment.

How does it benefit you?

There are multiple benefits to debt consolidation which include:

– Dealing with one creditor versus multiple…one new loan is taken out to payout all outstanding debt.

– If you get a loan with a lower interest rate you may have a lower monthly repayment

– If you reallocate any savings back into paying of the new loan, you may get out of debt sooner and save more in terms of interest.

– Dealing with one creditor can reduce the chances of late fees and or multiple negative marks on your credit file.

– You may feel more organised and on top of your debt

What are the risks?

As with the benefits there are risks. With any important financial decision it is important to be fully aware of the drawbacks as they are never highlighted.

– Before you sign anything, be sure that the new terms will be putting you in a better position. Shifting debt around can be deemed as a band aid solution to the bigger problem of poor financial management.

– Be aware that if you are agreeing to longer loan terms, you may end up paying more interest in the long run, even if you are on a lower interest rate – short term gain for long term pain.

– Some lenders charge penalties if you pay off loans early and/or include hidden fees so be sure to read all terms carefully.

– Some people end up in further debt because they have access to more credit. If you don’t cancel the accounts that are a part of the original consolidation, it may be tempting to use this credit again.

To be successful with a debt consolidation, you have to get control of your spending and avoid the risk factors mentioned. Rearranging debt and not changing poor financial habits will only result in further money problems. In the case of emergency financial assistance there are great benefits you can utilise instead of taking on more credit.

Image by Stuart Miles