Is Consolidating Debt A Good Idea?

Is consolidating debts a good idea?

The idea behind consolidating debts is to simply get a big loan and pay off all existing debts, then get enough time to breathe through as you gradually repay the consolidation loan.

Sounds great, right?

Even though debt consolidation offers relief to the debtor, it is not the perfect solution for all situations. There are certain factors to consider in deciding whether the best way to pay off your debts is debt consolidation. You must deeply analyze and understand your financial responsibilities. Understand what your expenses are and reduce them to be proportional to what you earn. Before you embark on any debt consolidation plan, you should also know what you have in hand to put into repaying the loan every month.

If you would not be able to afford the monthly repayments, do not settle for a loan. There are other Consolidation plans, know what the best move is for you. Consider your other options such as debt settlement, Borrowing from a savings or retirement account before you finally decide to take out a loan.

Pros of debt consolidation

Reduces Monthly Payments

Combining multiple debts into a single loan reduces the number of monthly payments and the number of interest rates you’ll have to deal with. Debt consolidation helps to pay debts quickly by giving you a clear beginning and end to multiple debts.

One Payment To One Source

Rather than struggle with multiple payments and creditors each month, you only have to make a single payment to one source. It prevents missing payment deadlines. 

Reduced Interest Rate

You no longer need to worry about multiple interest rates. Consolidation helps to limit your debt to just a source. There would be no need to pay interest on multiple debts.

Shorter Payback Periods

The consolidation plan considers certain factors when establishing the length of the loan, such as income, credit score, and the total sum of all debts. It then comes up with an efficient payback plan that would also cater to your monthly personal needs. Debt consolidation loans have a shorter payback period.

Cons of debt consolidation

Extra Expenses

Taking out a debt consolidation loan may involve additional fees like loan origination fees, balance transfer fees, closing costs, and annual fees.  This depends on the terms and conditions of the institution granting the loan. 

Consolidation Does Not Eliminate Your Debts

Debt consolidation means that you are simply managing your debts and not completely resolving them. It may give you an illusion of being debt-free and land you into deeper financial chaos.

Increased Interest Rate

When you consolidate debt, the repayment timeline starts from day one.  It may also extend for as long as seven years.  Most times, the low-interest rate offered at the beginning is just a faux. Over time, the interest rate gets inflated.

Doesn’t Develop Healthy Financial Habits

As recently reported by the bank of Canada, the average debt held by Canadians, excluding mortgages is $20,759. This high rate of Consumer Debt only shows how Canadians are neck-deep in debt.   And as they resolve a financial crisis, they dive right into another.  Although consolidating debt simplifies payments, it doesn’t address the underlying financial habits that led to those debts in the first place. Financial discipline is highly essential.  Healthy financial habits need to be adopted to prevent deeper debt and learn good money management habits.

Conclusion

The fastest way to get out of debt is to decide that It’s time for a life change and focus on being disciplined while at it. 

From all that has been discussed in this article, Debt consolidation can be an intelligent decision to make. However, it is not advisable in certain situations. There are also specialized consolidation programs designed for certain kinds of debts like student loans. If you use credit cards to pay for impulsive spending, consolidation is not a good option. If you are in trouble because you don’t have a budget or won’t stick to one, or you aren’t disciplined enough to make on-time payments, then debt consolidation won’t work.

For borrowers who have multiple high-interest debts, Debts consolidation is a good idea. However, it may only be beneficial if your credit score has improved. You must have also addressed the underlying problems that led to your current debts, like overspending, Impulsive spending habits, and making unwise financial decisions.

Paying off multiple credit cards with a debt consolidation loan is not an excuse to run up the balances again. It can lead to more substantial financial issues down the line. To be responsible with your money and barely depend on credit cards is imperative to making debt consolidation work. 

Evaluate your financial situation to know if debt consolidation is the best move for you and get professional advice from qualified professionals. Above all, Live within your means.