When is it a good idea to consolidate debt?
Debt consolidation is a financial strategy used by consumers with multiple creditors. Simply put, it is a debt relief strategy in which you, the consumer, take out a consolidation loan that is used to pay off all existing creditors. Then, you only have one debt to repay — to the lender who tendered the consolidation loan. This makes it easy for you to manage your payments, as you'll only have one per month to make.
Advantages of Debt Consolidation
When you consolidate debt through a loan, you are satisfying all your existing creditors in full. This is a much better option than renegotiating your outstanding debt, which often culminates in the creditor settling for less than they are actually owed. This can have a lasting and negative impact on .
Another distinct advantage is that you will pay back the consolidation loan at interest rates that are typically lower than what you're paying your creditors. Depending on the extent of your debt, this alone could save you thousands of dollars.
Over time, you will also enjoy an improved credit rating as you get out of debt. A better credit rating will make it much easier for you to get financed for major purchases and realize your dreams of home ownership. Typically, when you get financed for a major purchase while you have bad credit, you'll be stuck with a very high interest rate, which often ends up making the problem worse as the payments keep you deeper in debt for a longer period of time.
Disadvantages of Consolidating Debt
One of the most common pitfalls of dealing with debt consolidation lenders is that they'll want you to swap out your unsecured debt for secured debt. They'll dangle the prospect of being debt-free over you like a carrot, only to pull the rug out from under you by telling you that you'll have to back the loan with your house or another valuable asset. If you're in doubt about a given offer, talk to a credit counselor before making any decisions.
Beware of companies that use debt consolidation leads to find you and make you an offer that seems too good to be true — it probably is. These lenders use to identify individuals struggling with debt and, more often than not, try to exploit their situations for their own benefit. As with any loan, you should shop around for a debt consolidation loan to ensure you wind up with the best deal at the best interest rate.