Millions of individuals and families in North America are in debt. Whether you want to analyze good debt or bad debt and the merits of classifying debt one fact remains indisputable – people have over extended themselves to the point they can’t manage their debt, and they need help. Whether their credit cards are maxed out or they are having issues paying their university student loans back debt has snowballed for quite a few people who could use some debt help. A lot of these people are likely wondering: is debt consolidation bad? As usual the answer to this question is subjective and in this writers opinion each individual scenario is different just as each individual is different.
So is debt consolidation bad? Lets look at the upside and downside of debt consolidation.
Is Debt Consolidation Bad? The Upside
- LOWER INTEREST RATE! Those high interest loans consolidate under one lower rate. Lower interest means …
- One singular lower monthly payment. This will result in fewer bank fees and chances of missing payments.
- Speaking of fees, the company representing you may be able to get your creditors to drop some late payment fees. Personally I detest “fees” be it ATM fees, late fees or PayPal currency exchange fees.
- You now have one creditor that you deal with. Less debt to keep track of and fewer creditors to interact with. Could this lead to less stress?
- Since you have one creditor the collection agencies should stop calling you incessantly.
- Once your debt is being actively dealt with some creditors may forgive your credit rating decreases. Improving your credit rating is pretty important and paying off your debt will help remedy a poor credit rating.
Is Debt Consolidation Bad? The Downside
- A debt consolidation loan is a secured loan. This means that you need to “secure” the loan against something of value such as a vehicle or a home. This can be a scary proposition for some individuals.
- Loan term length. If you get a debt consolidation loan that persists over many years you will be paying off the debt for the agreed to term. This could lead to paying more interest over time against the debt than if you had not consolidated in the first place.
- Debt consolidation means you are signing a legally binding contract. Contracts have many clauses in them. If the borrower doesn’t take the care and caution to read and understand the loan they could end up paying balance transfer fees and/or application fees. This adds to your debt.
- The borrower may rack up more debt. A poor financial plan might have gotten the individual into debt and lowers payments could lead the borrower to spend, or worse, borrow more money if they continue as they had.
It appears that there are some potential pitfalls one could encounter if they consolidate their debt. The individual has to change their financial habits and fully understand the legalities involved with taking on debt consolidation. Those who take the benefits of debt consolidation to heart and don’t worsen their situation by acting irresponsibly while also educating themselves on the new agreement they are entering could do well consolidating debt.
This brings us back to the original question: is debt consolidation bad? Depends. There is a load of potential for someone looking to turn their financial situation around but also some risk for those unwilling to do the same.