Debt consolidation has emerged as the most popular way to get rid of overwhelming debts that one is currently trapped into. Those, who speak in favor of debt consolidation, are of the view that it will help the debtor find a strong financial foothold once again. Others are pole apart from the financial gurus holding an optimistic view about debt consolidation and warned the prospective debtors against going for it.
Here is my take on debt consolidation. I don’t want to fob off my opinion and will explain both pros and cons of the option, leaving it to you to decide what to do.
Debt Consolidation – What is it all about?
Debt consolidation, in laymen’s term, refers to clipping all existing debts into one package, making it a large one but at the same time, facilitating payment. After your debts are consolidated, you don’t need to make multiple payments to several creditors; instead you will have to make payment only once in a month to one creditor.
There are both advantages and disadvantages of debt consolidation. First let us check how it could benefit you.
Advantages of Debt Consolidation
If your current financial condition is too poor to manage all debts, nothing can give you a good respite than debt consolidation. By getting your debts consolidated, you will no longer have to live the life of an absconder and lenders will, no more, chasing after you to get their debts paid.
In all likelihood, you will be able to receive low interest on debt consolidation compared to all current interests summed up. If you have found good guidance in form of an experienced credit counselor, he will negotiate for waiving of late fees, which will see total payable amount much reduced.
Debt consolidation is fairly a good option and usually does not push the debtor into further troubles, especially if he/she has chosen the right way to fix up the financial issue. I won’t say that there is no risk in it but the amount of risk is very negligible.
Disadvantages of Debt Consolation
If you choose the wrong option of debt consolidation, which does not go well with your case, you may end up paying more payments every month. Even if two persons are in debt traps, their situation could be completely different and choice must be made subject one’s to own financial circumstances.
According to some financial experts, when someone is sagging under heavy burden of debts, consolidation does not do much to improve his situation in remote future if he does not take a lesson from his present drooping financial stature.
The two most common ways of debt consolidation are discussed below:
Credit Counseling: It is actually of non-profit nature and involves credit counselors who brainstorm mid-term solutions gladly accepted by both creditors and debtor. Many credit counselors also draft a budget for their clients and take the responsibility of disbursing payment to the creditors. In that case, you need to make payment directly to your credit counselor.
Debt Consolidation Loan: Many banks offer debt consolidation loans against collaterals. However, if you don’t have collateral to put up, you may go with unsecured loans. However, flipside is these loans are laced with a heavy interest.
By consolidating debts, you actually treat the symptoms and not the root causes that shoved you into the problems and which went beyond your capability of management.
Tina Roth a personal finance blogger at PRO Finance Blog. She is a commerce graduate and loves to write about money and finance management.