We are an increasingly consumerist society, and most of us believe in shopping even if we are low on cash. On the other hand, the availability of loans makes it easy for us to buy anything we need and when we need it. There are loans available for all kinds of things such as cars, homes, household gadgets, and even personal expenses. To add to that is the omnipresent credit card which is remarkably easy to obtain and use now. Though it is good news for people in need, there is a flip side to it as well. When borrowing money becomes a habit, it often becomes difficult for us to manage all the repayments, and it is easy to fall into a looming debt trap. When faced with this kind of a debt crisis, a well-drafted debt consolidation program can come in handy. Many institutions offer such loans, and you can easily compare their terms and check their reviews to decide which is best for you. However, there are some things you need to know and understand about debt consolidation before opting for it.
What is Debt Consolidation?
Debt consolidation is the process of borrowing a large sum of money to pay off multiple small but high-interest loans. Collating all your smaller loans and paying them off at once will rid you of the burden of managing multiple loans and handling creditor calls upon delay in payment. In an ideal scenario, the consolidation loan comes at a much lower interest rate and favorable repayment terms, which makes it easy for you to pay off the large amount on time. The debt consolidation loan can be either secured or unsecured. The consolidation loan would sometimes be enough to pay off all existing loans, but usually, it is only enough to cover some of the current loans. In such scenarios, you need to take a judicious decision regarding which of the existing loans you would pay off first.
One more thing about debt consolidation is that it might not always be necessary for you to engage the services of a company to help you structure a debt consolidation. You can very well do it yourself by taking a single loan to pay off existing loans. However, the problem in doing that is that you might not have complete information and understanding of the process, which means you will be at risk for getting a deal that ends up pushing you deeper into the debt trap. That is why it is always preferable to seek an expert’s help even if it means paying some fees initially.
Is Debt Consolidation Better Than Debt Management or Debt Settlement?
There are two other terms which are commonly misunderstood to mean the same as debt consolidation. The first is debt management, which refers to a well thought out plan to manage multiple loans better. It is a series of steps that you can follow to maintain payment cycles. Debt Settlement, on the other hand, refers to a one-time payment made to clear all or most of the many dues. That is usually done after a series of negotiations with the multiple creditors so that a solution can be worked out that is agreeable to all.
So, there is not any comparison between debt consolidation and the other two terms as that would be like comparing apples and oranges. However, like any other financial solution, debt consolidation has its pros and cons, and you should consider both carefully before opting for it. The experts believe that doing it wrong can turn debt consolidation into a double-edged sword, and you must be careful while choosing it.
Advantages of Debt Consolidation
The first advantage is that you have to worry about one payment instead of several smaller ones. You do not need to keep track of payment schedules on multiple loans or face calls from various creditors. If you have a decent credit rating, you are likely to be able to negotiate the consolidation loan at a much lower rate of interesting than your existing lines of credit. Finally, the tenure of a consolidation loan would typically be longer than the average tenure of existing loans.
Disadvantages of Debt Consolidation
If you think that consolidation will get rid of all your debt troubles and you will no longer need to pay off the borrowed sum, you would be profoundly mistaken! It just means that instead of having separate fires burning under different pots and pans, you just transfer all the ingredients into a single container and burn one fire underneath it. The new loan would most likely keep you bound to loan repayments for a more extended tenure in exchange for better rates of interest. Even though your credit score will take a slight hit as a result of the latest borrowing, it will gradually improve after you pay off the smaller loans and maintain consistent payment on the consolidation loan. Finally, the small debts that you will consolidate would most likely have been unsecured loans such as credit card bills or student loans, but if the debt consolidation loan is a secured loan, then the asset you put up as security might be exposed to risk till the time you repay the loan entirely.
Is Debt Consolidation Program Right for You?
The answer to this question depends on you and the specifics of your financial situation. On the face of it, debt consolidation does offer several advantages as listed above, but your ability to handle timely repayment along with your daily expenses will determine how suitable it will be for you. Before you get into a situation where debt consolidation is needed, a sound debt management plan would be a wiser choice so that the multiple debts can be controlled better. If that does not work or is too little too late to bail you out, only then should you go for debt consolidation. It is a standard tool used by debtors and could help you also as a last resort to bail you out of a potential financial meltdown.
Isabella Rossellini is a marketing and communication expert. She also serves as a content developer with more than seven years of experience. She has previously covered an extensive range of topics in her posts, including business debt consolidation and start-ups.