Just about anyone burdened by a large number of open debt accounts has probably considered a debt consolidation loan. On top of making everything simpler, it would also free up more of your finances every single month.
While this is all fine & dandy, there are some negatives that go along with debt consolidation loans and it is important that you understand what they are.
After all, once you sign the contract you are committed to the new deal. And it wouldn’t be very good to commit to something that you’re not really clear on whether it would benefit your situation or not.
Pros of Debt Consolidation
The most sought after feature of any debt consolidation loan is the left over money that you will have with a single combined bill. They can lower the payment for you because you are going from a bunch of tiny accounts to one single combined payment account. With that account, you’ll have much more money left over when all is said and done each month.
A single payment means that you have less bills to keep track of. With that one single payment you are much more apt to make your payments on time than you would have been for all of those multiple payments. In this way debt consolidation will simplify your life quite a bit and you won’t have to worry about missing any of those bills each month, because now all you’ll do is be concerned with one affordable convenient monthly payment.
You credit has probably already taken a hit due to delinquent payments. But with timely payments on the new loan, this will begin to gradually improve your credit score. This is your second chance – don’t blow it!
Cons of Debt Consolidation
While it probably sounds pretty great to have more money left over every month, there is another side to consider with this setup and it would be helpful to look into the cost that you have to pay for these lower payments. After all, the debt consolidation business is not doing this just to be good samaritans; they’re also in it to make money. And they can’t possibly charge you less than what they spend to get you out of debt.
While lowering the monthly payment may be a way for a debt company to help you out, it is also a way for them to make more money. Since the amount you pay in interest accumulates more over the time that it takes you to pay off your new loan, you’re actually paying more by making those lower payments. The prolonged payments and interest rate helps increase the gap between the amount it takes for them to service your debt and what you ultimately end up paying.
Debt consolidation is a double-edged sword that should only be used if necessary and you have an income to agree to the revised payment structure. Sure you will be given more freedom and less burden to pay off your debts, but you’ll also be paying on that loan for much longer than you originally planned. So keep this in mind when considering getting a debt consolidation loan. For some it’s a great move, for others not so much.