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The Pros And Cons Of Debt Consolidation

A common step to take for many when struggling with debt, or simply juggling multiple lines of credit, is to move all that debt to a single place. This is a good idea for many, but it is not always the best solution, depending on circumstances. With that in mind, we decided to take a look at the pros and cons of debt consolidation.

Considerations To Make

There are times when you should contemplate debt consolidation and disregard the restrictions. After all, if life has taught me anything, it’s that we make decisions based on probabilities rather than absolutes. Here are the odds you must consider, mostly in terms of debt repayment:

  • You owe money on high-interest credit cards and are having trouble repaying any of the principal.
  • A desire to avoid paying interest.
  • Your debt is substantial (or it is a large proportion of your take-home pay).
  • The necessity to pay off your debt faster.
  • You have a significant net worth and can afford the collateral.
  • You have a good plan in place to repay your consolidation loan.

A Good Example

When you want to save money on interest, debt consolidation is a wonderful option. Taking up a consolidation loan and utilizing it to pay down higher-interest debt could save you a lot of money in the long run. The credit card firms upped our yearly interest rate from 19 percent to 27 percent when we consolidated our debt. Our secured debt consolidation loan came with a 7% annual interest rate, which, while still a significant sum given the size of our debt, made debt repayment more manageable. There are numerous borrowing choices available today, including peer-to-peer lending arrangements, some of which are available even to persons with less-than-ideal credit histories and scores.

Pros And Cons Of Debt Consolidation – Other Possible Situations

You should be aware that loan repayments are calculated in such a way that some of the principal is always paid rather than just interest. When you have credit card debt, it’s quite tempting to pay simply the minimal amount to avoid the pain of changing your life and paying off your debt. This is obviously the wrong thing to do, yet it is a very profitable business strategy for credit card companies, implying that it is something that many of us do on a regular basis.

Pros And Cons Of Debt Consolidation – Interest Rates

Taking for a debt consolidation loan also protects you from interest rate rises that are out of your control. Ensure that the contract outlining the loan’s terms also includes the interest rate; otherwise, you’re unlikely to receive a letter telling you that the interest rate on your loan has increased by 3%. This is a common occurrence with credit cards.

Save Energy AND Bother

Yes, I’m serious about this one. Having to deal with debt in nine separate places would have been quite draining. Having everything in one place saved me a lot of time, effort, and concern. It’s also quite simple to track your debt repayment progress – I had a lovely spreadsheet with a downward-pointing arrow. I’m still amazed at how beautiful it is, and I appreciate it on occasion.

Pros And Cons Of Debt Consolidation – When It Is A Bad Idea

For instance, taking out a loan normally requires collateral, which means the bank will ask you to put something down as security in order to assure you would repay the loan. If something goes wrong and you can’t pay it back, this is a major issue.

Also, if you’re locked into a fixed interest rate, it can be difficult to switch if better offers come along. Finally, long-term debts can be detrimental. Even though the interest rate is lower, repaying a loan is a long-term commitment, and total repayments may exceed what you previously spent.

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