Debt Consolidation Loan
If you are in a lot of debt and struggling to find a way out, you might consider a debt consolidation loan as a solution to your problem. By consolidating multiple debts and outstanding balances into a new loan product, you can free yourself from the need to make multiple payments each month, simplify your life, and even lower your monthly expenses.
And if your debt really gets out of control, debt consolidation can even offer a way to save yourself from debt collection, bad or damaged credit, or bankruptcy.
But, is debt consolidation the only way to go?
Disadvantages of Debt Consolidation Loans
While consolidating your debt is one option to consider, it doesn’t make sense for everyone. In fact, debt consolidation often complicates the problem of too much debt for many people, simply because of how it works.
Here are some of the main reasons why debt consolidation is rarely the best way to get out of debt:
Debt consolidation cannot lower your interest rates.
While it’s true that debt consolidation can help you combine all your debts by getting a loan with one monthly payment, you may not actually be saving money by the time you complete the process. If you don’t secure an annual percentage rate, or APR, which is much lower than the weighted average interest rate you have now, you could pay the same amount.
You may need to extend your repayment schedule and live with longer debt.
Debt Consolidation Loan
Depending on the terms of your new debt consolidation loan, you may actually be able to extend your repayment schedule. If that’s the case, you’ll be spending more time in debt than you’re spending now, plus potentially paying off more interest as well.
Debt consolidation usually makes people feel relieved they are reducing the number of monthly payments they need each month. However, because you still have the same amount of debt, this feeling can give you a false sense of accomplishment. You don’t pay debts by consolidating them; You just move them.
It doesn’t help you change your behavior.
The biggest disadvantage that comes with debt consolidation is that it doesn’t help anyone change their behavior in the long run. If you’re accumulating dozens of credit card balances and consolidating them for peace of mind, what can you make sure you don’t do the same thing again? Without a long-term plan to avoid debt and change your spending habits, you can easily be worse off than when you started.
If you really want to pay off debt, it’s important to know that debt consolidation isn’t your only option. In some cases, you may be much better off paying off your debt the hard way. On the other hand, zero interest, balance transfer credit cards can help you speed up the process.
At the end of the day, it’s up to you to figure out which option will best suit your lifestyle and goals. And no matter what, there isn’t a right answer for everyone. Before you pull the trigger on debt consolidation or credit card balance transfer, make sure you know what you’re getting into. Also, you have to make sure you understand yourself and your limits.
Have you ever taken on a debt consolidation loan or taken advantage of a balance transfer offer? Why or why not? You can read the full Debt Consolidation here.