More and more people today are seeking respite from their financial problems by consolidating their loans. Debt consolidation is a theoretically simple process of combining all the loans of a person into a single loan, with a single rate of interest and repayment pattern. When a person consolidates his/her loans, the payment is to be made only to the consolidator, and he/she ceases to be accountable to the previous creditors. Debt consolidation is also known as debt refinancing, or in common terms, debt settlement.
Though debt consolidation seems to be a very easy process to begin with, there are some ups and downs of the process that need to be considered carefully. Let us discuss the advantages and disadvantages that are association with debt consolidations.
Advantages of Debt Consolidation
(1) The first reason why one should consolidate the debts is that it simplifies the money management process. After consolidating the debts, the person makes only one payment. Also there is only one bill that comes in through the mail, which reduces the tension. All kinds of loans such as credit card loans, medical loans, car loans, student loans, home loans could be consolidated into one.
(2) Not only will there be just one bill to be paid, the amount in it will also become significantly lower. This would allow more cash to remain in the house.
(3) Consolidation is done when the prevailing interest rates in the market are low. So, the person with a consolidated loan will continue paying on a lower rate of interest than compared to credit cards.
(4) There will be no more calls from creditors asking when to come and collect the payment. This becomes a big lightening of the mental tensions.
Disadvantages of Debt Consolidation
(1) Debt consolidation does not erase your debt. The whole debt is still to be paid. Consolidation only lowers the rates of interest.
(2) Consolidated loans are usually designed for longer periods of time. So you could end up paying more interest in the long run, even if your monthly payments are lower.
(3) There are several finance charges which will have to be paid when consolidating. This will increase the initial bills.
(4) Debt consolidation may put a person in a lackadaisical state of mind. The person may become too much at ease since the payments have become low. This could make the person go ahead and take some more loans and compound the problems.
Lending institutions that provide consolidation of loans will require making a careful investigation into the credit rating of the person before making the consolidation. They would make sure that the person will be able to pay off the loans even after consolidation. Having some equity could better the chances of getting loans consolidated.
If someone feels the cons of debt consolidation are too intimidating, then there are other options by which problems of indebtedness can be solved. Credit counseling services could help in this regard. They could even describe how debt consolidation only cures the symptoms, but not the disease itself.