Let’s face it! Debt Consolidation Loans are not a great discussion topic when it comes to personal finance. For that matter, anything to do with “debt” is not always pleasant but like it or not, debt is a big part of our lives. There are a lot of successful ways to reduce debt but there are situations where frugality and discipline aren’t enough to manage debt. It’s for situations like these that debt consolidation loans might come in handy. However, debt consolidation loans have earned some bad press and there are a lot of the so-called “debt consolidation” companies that end up doing more harm than good. So, the first step in the process is to understand the basics of debt consolidation before you consider opting for a debt consolidation loan.
Even if you have gotten a hang of debt consolidation basics and realize that your debt situation demands that you get a debt consolidation loan it is worthwhile to go a little deeper in understanding both sides of debt consolidation loans. Once you understand both the advantages and disadvantages of debt consolidation loans, you will be in a much better position to determine if debt consolidation loan is really for you.
Advantages of Debt Consolidation Loans
- Easier to Track & Manage Debts: With debts spread across multiple financial institutions it becomes a nightmare to track & manage debts. Amidst all this confusion, there is a risk of missing the payment deadline for one of the loans and accruing late payment fees on top of the already unmanageable debt. With a debt consolidation loan, you are literally consolidating all your debt in one place which makes it easier to track and manage your progress with debt.
- Lower Interest Rate:In most cases where debt consolidation is required, chances are that most of the debt is high interest such as credit card purchases and consumer loans for electronics etc. In such a scenario, a debt consolidation loan might offer you a lower consolidated interest rate as compared to what you are already paying. This means that you pay less interest which helps you pay off your debt relatively faster
- Longer Pay Duration: Debt consolidation loans also tend to be spread over longer periods thereby making your monthly payments smaller. This gives you the opportunity to actually make these payments instead of accruing more debt because you don’t have enough cash to pay the monthly payments
Disadvantages of Debt Consolidation Loans
- Higher Fees: While debt consolidation loans can help you with lower interest rates, you have to carefully account for the fees associated with debt consolidation loans. So ensuring that you do enough research about the fees charged by different providers can come in handy to ensure that the lower interest rate and the fees associated with the debt consolidation loans actually net out in positive for you. Otherwise, while you might be getting a lower interest rate that could be negated by the fees charged. One common example of debt consolidation without the help of a company is credit card balance transfer. So while you might benefit from a introductory ARR (lot of credit cards will offer you a no-interest plan for 6 months) it might be worthwhile checking if the new credit card itself has an annual fee attached to it
- Risk of accumulating more debt: This one makes debt consolidation loans a double edged sword. When you opt for say a new credit card for balance transfer, you might end up racking up more debt on the new credit card if you are easily tempted. So if you are addicted to debt, it may not be worth it to opt for a debt consolidation loan and instead opt for a peer-to-peer loan where you are not allowed to add new purchases to the loan amount.
- Negative Impact on Credit Score:Anytime you opt for a loan, your credit score gets impacted. This holds true with debt consolidation loans as well! Another potential reason why your credit score might be negatively impacted comes from closing the old card after the balance is transferred. So, your best bet is to do thorough research and opt for a single debt consolidation loan instead of opting for multiple debt consolidation loans. On the other hand, if you do qualify for a debt consolidation loan and meet the payment schedule it might have a positive impact on your credit rating and help improve your credit score.
These are some of the key advantages and disadvantages of debt consolidation loans. You should consider all these aspects and do a proper analysis depending on your debt situation to make a prudent choice. Also, all said and done debt consolidation loans are essentially a short-term solution for debt and a long-term one. Keep that in mind when you decide to opt for a debt consolidation loan because unless you change your spending habits and practise financial discipline no amount of debt consolidation loan will help you come out of debt.
Do you have any personal experiences with debt consolidation loans? Any specific things one should keep in mind when deciding to opt for a debt consolidation loan? Let us know via comments