Debt Consolidation – Pros and Cons
By Daily Dosh | November 26, 2007
Are you one of those people who have found that they have more debt than you can afford to pay each moth? Many people in this situation find themselves in a downward spiral. Often people are late in paying and so get hit with high late payment charges which only adds to the debt.
Many companies have sprung up offering people a life-line by allowing them to consolidate their loans into one. These companies can paint a very rosy picture suggesting that they have the perfect solution. Although in many cases it can be a good way to deal with debt, for others it may not be so good.
What is Debt Consolidation?
If you have many debts simply gather them all together and make one single repayment to a single debtor.
This on its own is not necessarily going to help. What does it matter if you pay $150 + $70 + $20 to three different companies or to $240 to one company? If paying online you don’t even need to factor in the cost of a stamp.
For debt consolidation to be worthwhile one of more of these things has to happen:-
- The total amount paid out every month has to decrease.
- The net amount of interest should decrease
- The total debt that you owe should decrease.
The deal you receive will totally depend on the company you go with and what plan they offer you.
Ideally all three benefits should take place. Most of the time the monthly payment will be lowered. The most obvious benefit of this is that it will be more affordable so you’re more likely to keep up with payments.
Stress and debt of course go hand-in-hand so knowing that you can pay your bills will also take a load off your mind.
Cons - The potential pitfall is that if the amount is too low you then may go out on a spending spree and find yourself in a worse financial situation.
The way that most companies reduce the monthly payments is by extending the number of years you have to pay it. In the long-run you will end up paying more in interest. Always try to negotiate the best deal and make sure that you make the payments every month.
When dealing with debt you need to be consistent and committed. Eventually you will have the freedom from debt that you wish.
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