The Pros and Cons of Debt Consolidation
One of the more common ways to break this cycle is through debt consolidation. This usually involves some sort of loan that will let you repay all your smaller outstanding debts, replacing them with a single payment and generally a lower interest rate. There are pros and cons to using this method, however.
For debt consolidation to be effective, one of three things needs to occur:
- Your total monthly payment has to decrease
- The total outstanding debt has to decrease
- The interest rate being paid has to decrease
If none of these conditions are met, there is no net advantage to debt consolidation. After all, whether you make monthly payments of $100, $75 and $25 or a single payment of $200 it really makes no difference if the interest is the same and the amount owed is the same.
The ultimate situation is when you can manage to get all three of these conditions in place, but that is rarely possible.
The most common result of consolidating your debt is that your total monthly payment can be lowered. The hardest thing for most people with debt problems is making all the payments every month. Lowering the total payment is usually the most helpful for those people, easing the stress and letting them get out from under the weight of their debt.
The risk associated with lowering the total monthly payment is that the poor spending habits that may have led to the debt in the first place can rear their ugly head again. It can give people a sense of having money to spare once again, and instead of using that "extra" money to pay down the debt faster, they spend it poorly.
It's critical to discipline yourself against poor financial habits during debt consolidation, to ensure the problem doesn't get worse.
Another thing to take into account when consolidating debt is that the lower payments are often reached by extending the length of the loan. Over the long term, this can result in higher interest costs if the debt is allowed to reach its full term.
The key to maximizing the benefits of debt consolidation is to continue to spend as though you have NO extra money every month, and put every spare penny towards paying the consolidation loan off.
Related Tags: credit card debt, debt consolidation, debt management, debt reduction, credit card consolidation
William Blake offers more advice about negotiating credit card debt yourself on the Debtopedia website. For more helpful information, visit http://www.debtopedia.com
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