Is it Wise to Go Through Debt Consolidation?

Debt consolidation combines your various debts into one debt. This simplifies your debt management, may reduce your regular payment amount and may reduce your total cost of debt. However, it may also increase your debt burden. Whether debt consolidation is a wise decision depends on your personal financial situation and the particular debt consolidation product you choose.

Regular Payments

Consolidating your debt turns your many regular debt payments into just one, making it easier to manage. Instead of paying several different bills with different interest rates at various times of the month, you only have to pay one debt each month. Depending on your debt consolidation product, you may also end up with a lower payment amount, making your debt more affordable. If so, it may be wise for you to go through debt consolidation.

Interest Rate

Depending on your financial situation and the debt consolidation product you choose, you may get a lower interest rate on your debt, easing your debt burden. However, if you consolidate your loan due to financial difficulties, you may not be able to qualify for the lowest interest rate available from the lender, according to Bankrate.com. Check with several lenders to determine the lowest interest rate you can get before deciding on one product.

Cost of Debt

If debt consolidation extends the period of your loan, you may end up paying more in total over the life of the loan, even if the interest rate is lower. Lenders who are trying to get your business may try to hide this fact from you. In this case, you may benefit more from not consolidating your debt. You can also find another debt consolidation product that will cost you less.

Warning

The lender may require you to put up an asset to secure the loan. This means that in case you don't pay your debt, the lender has the right to seize the asset, such as your home or your vehicle. If the lender can't negotiate with all your creditors, you may have to talk to them yourself. If your new lender doesn't pay your creditors promptly, you may end up with a lower credit score.