There’s no doubt about it, dealing with debt can be a struggle. When your debt load is overwhelming large, the only thing you can think about is a solution. If you’re like most people you want to ease the debt burden, but don’t want to ruin your credit with bankruptcy. Debt consolidation may have crossed your mind as a possible solution. Is it the right one for you?
What Is Debt Consolidation?
Debt consolidation is combining all your separate debts under a single debt umbrella. People commonly do this with a debt consolidation loan, a loan that has the specific purpose of being used to pay off your debts.
Not all methods of debt consolidation involve getting a special loan. If you have a credit card with a high enough credit limit, you can use a balance transfer to put all your debts onto that single credit card. Other common ways of consolidating debts involve combining credit card debt with your mortgage, taking out a second mortgage or home equity loan, or using a student loan. No matter which method you used, the goal of debt consolidation is to combine all your debts into a single loan.
Advantages of Debt Consolidation
- Lower monthly payments. By spreading your payments over a longer period of time, debt consolidation usually brings a lower monthly payment. The lower payments help ease a tight budget.
- Lower interest rate. With debt consolidation, you should aim for a lower rate loan or credit card. Lower interest means lower cost of debt overall.
- Easier to manage debt. After debt consolidation, you only have one debt payment to manage rather than several different ones. You don’t have to worry about various billing statements, payment amounts, and due dates. Managing a single debt will certainly relieve some of the stress of debt.
- Your home is at risk. When you secure your debt with a mortgage or home equity loan, you risk foreclosure if you fall behind on your payments..
- Higher cost of the debt. While extending your debt over a longer period of time can lower your payments, it also increases the cost you pay for the debt.
- You may need a co-signer. If your credit score has already been hurt by late debt payments, you may not without someone who’s willing to co-sign the loan for you.
Disadvantages of Debt Consolidation
Is Debt Consolidation the Answer?
Using debt consolidation is a viable option if you can do it at a low cost, without risking your assets or the assets of others.
Taking a close look at the advantages and disadvantages of debt consolidation puts you in a better position to decide whether to consolidate your debts. Realize that while debt consolidation can make it easier to pay off your debt, it doesn’t solve actually solve your debt problem.
Many people in debt have overextended themselves, lived without money for emergencies, and used debt to fund a lifestyle they couldn’t afford. Debt consolidation just masks the effects of these problems. It doesn't actually solve them. You must fix the habits that led you to debt in the first place. Otherwise, you can easily find yourself back in the same situation.
After consolidation, make sure you replace your bad spending habits with good ones that will discourage debt in the future.