Debt consolidation is the process through which a debtor combines all of his unsecured debts into a single monthly payment. Debt consolidation also lowers the interest rate and the amount that you will have to pay each month. You can either take out a consolidation loan; secured or unsecured one; or you can do balance transfer in order to consolidate your debts. Otherwise you can take the help of a debt consolidation company.
Pros and cons of consolidation
The pros of debt consolidation are:
1. Single payment – As all of your debts are consolidated into a single debt, you are required to make a single monthly payment instead of the several ones that you had to make before. Thus, there’s less fear of defaulting on your payment.
2. Lowered interest rate – In order to consolidate your debts, you are required to either take out a debt consolidation loan or transfer your credit card balances. Now, the debt consolidation loan is generally available at lower interest rates. Even if you transfer balance from your cards, it is generally transferred to one that has a low interest rate. Thus, with debt consolidation, the interest rate is lowered.
3. Lowered monthly payment – As the interest rate on your debt is lowered, the monthly payment that you will have to make is lowered too. Thus, it becomes much easier to continue making your payments toward the debt.
4. Late fees waived off – If you go to a debt consolidation company for help, the consolidation company other than negotiating low interest rate and monthly payment with your creditors, may also negotiate with the creditors to waive off the late fees and other penalty charges like the over limit fees.
The cons of debt consolidation are:
1. More time to pay off – Loan term is generally very long, so it may take you long time to pay off the debt.
2. Overall cost may be more – As the loan term is long, you are required to pay more toward the interest. Thus, you are actually paying more.
3. Scam company – The consolidation company can also be an illegal or scam company.
4. Loss of property – If you take out a secured loan to consolidate your debts and if you are unable to make payments, your property can be taken away.
Thus, debt consolidation helps you get out of debt. But, you will also have to weigh both the pros and cons of debt consolidation before opting for it.
Ryan Smith is a contributory writer associated with the Debt Consolidation Care Community and has written several articles for various financial websites. He holds his expertise in the Debt industry and has made significant contribution through his various articles.