When you are planning your finances, debt management is one of the key steps to work on. Why? Because certain levels of debt hinder your ability to save and invest money. Fortunately, there are several debt management strategies to explore, including debt consolidation. 

Debt consolidation might sound and look like the best debt management option, especially if you are too deep in debt. But is it really? 

If you are here, then you are ready to get yourself out of debt. In this article, I will take you through the pros and cons of debt management and provide key tips to help you decide whether debt consolidation is the right option for you! 

What Is Debt Consolidation

Debt consolidation is the process of obtaining a new loan to pay off outstanding debts. It allows you to bundle several loans, even from different creditors, into one and with one creditor. 

The creditor offering a loan consolidation will extend credit to repay the outstanding debts, leaving you with a new loan for the money you received to pay off the other debts. 

It is usually brought up as a debt management solution with a promise of advantageous payback terms—a lower monthly payment, a lower interest rate, or both. You can consolidate debts to address student loans, credit card debts, and other obligations.

Advantages of Debt Consolidation

1. Quick Payoff of Outstanding Debts

Getting a consolidation loan can assist you in accelerating the process of debt repayment, particularly if you have considerable credit card debt. While credit cards do not have a specific schedule for paying off a balance, a debt consolidation loan has fixed monthly payments and a defined start and finish date.

2. Ease of Managing Your Finances

Since the loan funds are used to pay off other obligations, debt consolidation might reduce one or three monthly payments. This approach can simplify planning and reduce the likelihood of missing payments.

3. Low-Interest Rates

Rates vary according to your credit score, term length, and loan size. However, you are likely to earn a cheaper interest rate on a consolidation loan than on your credit card.

4. Fixed Repayment Plan

If you take out a private loan to repay debt, you will know how much will be due every month and when the final payment is due. Paying merely the minimum on a high-interest credit card could take years.

Disadvantages of Debt Consolidation

Away from its several advantages, debt consolidation doesn’t come without some cons. No matter how much relief you might think it will provide, it is important to take a step back and evaluate these disadvantages. 

1. Initial Charges

Any loan undertaking will include some costs, like loan origination fees, closing costs, balance transfer fees, and yearly fees. Before taking a consolidation loan, enquire about all fees, even those associated with late payments or early repayment. Depending on your lender, these fees can range from hundreds to thousands of dollars. Although paying these fees could still be worthwhile, you should factor them into your decision about whether debt consolidation is right for you.

2. Might Not Solve Your Debt Issues

Debt consolidation isn’t a rosy bed that will cushion you from debt. If you have a habit of living above your means, getting back into the cycle of debt is very likely. Working with a budget might come in handy for you. 

Additionally, you should start saving for an emergency fund, which you can use to cover financial surprises, allowing you to avoid relying on credit cards.

3. Higher Rates

Sometimes, debt consolidation might lead to getting a higher interest. There are several factors that could lead to this, including: 

• A poor credit rating
• How much you need 
• The term of the loan 

4. Expensive 

Speaking of loan duration and a lower APR, these might look like the best deal, but they could be more expensive in the long run. A longer repayment period will certainly earn you a lower APR. However, it means you will be paying your loan for longer, making it more expensive than a loan with a shorter repayment term. 

Is the cost of more interest repayment worth it? To make this decision, look at your financial plan and objectives. How will they be affected by such a decision?  

5. Late Payments Will Cost You

Most consolidated debts come with fixed terms, including a fixed repayment amount. They are also accompanied by a late repayment fee. So, if you miss a payment or two, you will certainly be setting yourself up for financial trouble. It would be best if you automated the loan repayments and ensure your account always has money. 

Should You Consolidate Your Debt?

Your circumstances determine if you need to consolidate your debt or not. Here are some instances in which you can consolidate debt:

• You have an excellent credit score – if you’ve got a strong credit score, you’ll have a greater chance of obtaining a lower rate than you currently pay on your debt, which could result in significant savings.
• If you prefer fixed interest rates, repayment terms, and monthly payments, a consolidation loan may be appropriate for you.
• You desire a single monthly payment – additionally, a consolidation loan may be a suitable option if you dislike keeping track of many payments.
• Finally, this loan will benefit you only if you are in a position to repay. If you cannot do so, you risk digging yourself deeper into a financial hole.

In Conclusion

Before agreeing to a consolidation loan, compare your present minimum monthly payments and the estimated time required to repay the debt to the expense and time of a consolidation loan.

When contemplating debt consolidation, analyze what contributed to the debt mountain and address those core causes. While debt consolidation may provide immediate relief, it may not fix the issue if underlying concerns such as overspending remain unresolved.

Conclusion

Before agreeing on debt consolidation, compare your present minimum monthly payments and the estimated time required to repay the debt to the expense and time of a consolidation loan.

When contemplating debt consolidation, analyze what contributed to the debt mountain and address those core causes. While debt consolidation may provide immediate relief, it may not fix the issue if underlying concerns such as overspending remain unresolved.