The Pros and Cons of Debt Consolidation
Consolidating debt into one monthly payment may be a good option for those in a difficult financial situation. To ensure that such an economic commitment is right for a person's budget, they should consider the following advantages and disadvantages before proceeding.
Advantages of Debt Consolidation
When a borrower decides to consolidate debt, budgeting become simpler. With one loan being taken out to repay all debt, a borrower only has one payment to remember each month. Doing so will help people avoid missed payments, late fees and detrimental effects on credit score. Consolidation loans often come with lower interest rates than other loans have, which can save a substantial amount over the life of the loan.
Disadvantages of Consolidating Debt
If a person chooses to go into debt consolidation, it may take them longer to repay all their debts. In most cases, when debt is consolidated, the borrower still owes the same amount—but the loan length will be longer because all the debt is rolled into one lump sum. Borrowers should confirm with their lender that the loan can be paid early without prepayment penalties.
Debt Consolidation Brisbane requires people to make (and stick with) a strict budget. The fact that the borrower has to find a lump sum each month by a specific date, and that the payment is larger than all the others combined, means that the person's finances must be organized. If a person can time their monthly payment to their pay period, the arrangement may be beneficial.
Risks of Consolidation
Despite its advantages, debt consolidation shouldn't be used as a "quick fix". If a person's ultimate goal is to get out of debt, a consolidation loan may not be the way to go. Various estimates suggest that up to 70% of consolidators end up back in debt a few years later.
Getting a loan consolidation doesn't require behavioral changes; if a person doesn't change on their own, they'll soon find themselves right back where they started. These loans aren't inherently bad, but they only work if a person has enough financial discipline to get out of debt and stay that way.
Debt consolidation has its pros and cons, and what's right for one person may not be appropriate for another. When a person decides to debt consolidation loans with an understanding of how the loan affects their financial situation, they can be assured that they're headed down the path to a debt-free existence.