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Before exploring the pros and cons of debt consolidation, it is first essential to understand what exactly debt consolidation is with our quick-read guide.
Debt consolidation combines debts, such as credit cards, loans and overdrafts, into one single loan.
So when deciding to proceed with debt consolidation, you’ve essentially borrowed enough money to pay off your various credit commitments and now owe money to just one lender.
Doing this allows you to go from owing ten different creditors to just one creditor. When you see it put this way, it’s easy to understand why many people would choose to do this. Who would want to deal with ten different companies when you could deal with one?
Before you decide whether you are, or aren’t team debt consolidation, here are a few pros and cons for you to consider.
Four advantages of debt consolidation
1. Save money on interest
Borrowing money at a low-interest rate to pay off loans or credit cards at a higher interest rate could save you money in the long run.
2. Fewer creditors to deal with
One considerable stress of debt comes from owing money to many different creditors. It becomes difficult to remember how much you owe to whom and the dates these payments are due. It’s challenging to keep track of payments made and the remaining balances due.
3. Potential lower monthly payments
Your monthly payments could be lower because the loan is new and sometimes spread out over a longer loan term. This means less of your budget will go to debt every month.
4. There is a debt end date
If you’re continuously only making minimum monthly payments, a debt such as overdrafts and credit cards can stay around for a long time. However, with a debt consolidation loan, there is an end date, so you have no choice but to pay off all the debt by the agreed date.
Four disadvantages of debt consolidation
1. It could cost you more
While it is possible to save money on interest by taking out a debt consolidation loan, it’s essential to do your research as it could cost you more. Depending on the terms of your debt consolidation loan, you could potentially pay more in interest over the life of the loan.
2. Old habits die hard
Debt consolidation is sometimes the easy way out. Because of this, people who opt for this loan often find themselves back in debt soon after, as they don’t fix their spending habits or still don’t have enough money coming in each month to get by. It’s vital to deal with the root cause of the debt to ensure you don’t find yourself back where you started.
3. It’s not universal for all
Just because you think a debt consolidation loan would answer your problems doesn’t mean you’ll qualify for one. Unfortunately, a debt consolidation loan isn’t available to everyone. If your credit score is low, you may not qualify for one.
4. A missed payment could set you back
Missing a payment on your debt consolidation loan could damage your credit score. Additionally, late payments may leave you subject to extra fees.
Not all debt consolidation loans are equal, so make sure you do your due diligence before deciding which debt consolidation company to choose. Online comparison tools like the one found on moneysupermarket.com can help you find a deal to suit your needs without harming your credit score.
Tolu is a Money Coach and Content Creator, passionate about helping others break the payday-to-payday cycle and achieve their financial goals, through the power of intentional budgeting, saving and investing. When she’s not talking about money you can find her spending time with her 3 boisterous boys.