Sometimes, things don’t go the way we expect them. A medical emergency or an event that disrupts our income can quickly land even the most fiscally-aware person into debt. Of the many debt relief strategies that could be used to get out of debt, debt consolidation is one of the most talked about. Combining different debts is an attractive way to ensure that the difficulties of juggling and managing different debts are a lot less of a burden.
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Who needs debt consolidation?
This strategy isn’t for everyone, nor is it necessarily foolproof. It works best for people who have a steady job and if their debts do not exceed more than half their income. It’s definitely not for someone without any means to support themselves. We normally recommend that the following applies before you pursue debt consolidation as a debt relief strategy:
- Your total debt payments do not exceed 50% of income.
- Your credit rating still qualifies for 0% Credit Card or Low Interest consolidation loan.
- You have a decent and consistent cash flow to cover your monthly bills.
- You have a strategy for controlling your spending or increasing your income.
Debt Consolidation Pros
1.) From many payments to one single payment
Debt consolidation takes a number of different debt payments and organizes them into one monthly bill. This makes it easy to keep on top of your debts and removes the burden of prioritizing creditors from you. All you’ll have to do is pay one amount to one account every month and you’re done.
2.) Reduced interest rates
Despite what many cynics might think, most creditors are not interested in keeping you in debt forever. There’s a cost to collecting and managing debts, and most creditors are reasonable enough to give you a lower, more realisticrate2s that you can actually pay. The benefit to you is that you will also pay less than you were originally supposed to.
3.) Reduced monthly payments
Not only will many creditors agree to lower interest rates, many will also agree to reduce the actual amount that is to be paid. In any case, you will normally pay less than you otherwise would if you go for a debt consolidation plan.
4.) No more calls from collectors
As you will presumably be servicing your debts, there’s much less of an incentive for debt collectors to bother you at home and at work. The peace of mind that results from this is one of the biggest benefits debtors who take on a debt consolidation plan.
Debt Consolidation Cons
1.) Success is behavior dependent
A debt consolidation plan will not fix the reason you got into debt in the first place. It may sometimes make it worse because it will leave you with a little bit of cash to spend. If you’re not smart about how you handle this money, you can be worse off than you were before. Use the money to invest in other money-making activities, or use it to take care of your debt.
2.) You don’t always spend less
Sometimes the plans are structured in a way that you spend more overall, though you actually spend less on your debt per month. Sometimes it might be necessary to take on such a plan in order to provide you with some breathing room. While not always the case, it’s worth keeping in mind.
3.) Your credit rating can take a hit
Depending on how the debt consolidation plan is handled, or how credit rating agencies see your situation, your credit history and your credit rating can be negatively affected. This can impact your lifestyle for years to come.
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