Debt consolidation seems as an easy solution to reduce a person’s debt burden, but it has its own advantages and disadvantages.
A substantial number of people nowadays get themselves into so much debt that they sometimes have to go further into debt in order to pay it. This fighting-fire-with-fire approach, if misunderstood or misused, can lead to further debt problems instead of helping to solve them.
What is Debt Consolidation?
In a nutshell, it involves taking out a single loan (secured or unsecured, depending on the package offered) to settle all his or her numerous other loans.
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
Consolidating your debt offers several advantages. For one thing, it’s often easier to make a single payment than trying to remember what to pay off when—some people are just not that good at remembering and scheduling payments.
The convenience offered by such a loan can also offer peace of mind to a person. This will simplify your finances and your life for that matter.
The debtor can also benefit by the advantages of paying off a lower interest rate presented by one single loan, instead of having to pay off the interest of many high interest loans.
Naturally, when you consolidate your debt it has its own set of risks. One is that your credit rating initially takes a hit when you initially consolidate your debt—it is taking out another loan, after all, and essentially zeroing out any progress the person has made paying off the other debts.
Another is that consolidation loans might not offer interest rate advantages over individual loans, because people who have been paying off their loans for a long time can often renegotiate their terms with their creditor, and these might be lower than the interest rate offered by the company that’s going to consolidate your debt
Still another is that the debt refinancing plan can fail if the person doesn’t make some changes to curb his or her spending and save more money. Debt consolidation is a drastic step to take, a fact some people don’t seem to understand. Some see their credit card balance or their loan read “R0” and takes it as carte blanche to keep right on spending and spending.
In this situation, the new loan can act merely as a sticking-plaster on a serious wound—halting problems temporarily but doing nothing to remedy the underlying situation. If the person who took out the debt consolidation loan should then be unable to repay it—for example, they need the money due to a family emergency—they would find themselves in more trouble than they were at the start.
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