Consolidating your debt into one loan payment each month may be a viable option for your financial situation. In order to ensure that this economic commitment is right for your budget, consider the following benefits and drawbacks.
Debt Consolidation Pros
- Simplified budget. Debt consolidation allows you to take out one loan for all of your debt, which means you would have just one payment to make every month rather than struggling to remember to pay several different payments with varying due dates. Having just one due date to remember allows you to avoid missed payments and the resulting late fees and potential negative effect on your credit.
- Lower interest rate. A consolidation loan generally features a lower interest rate than some or even all of your existing debts, which can save you a substantial amount of money in the long run.
Debt Consolidation Cons
- May take longer to pay off debt. Generally, when you consolidate debt, you still owe the same amount of money, but since it is now in one larger lump sum, the length of the loan may be longer. Confirm with the lender offering the loan that you can pay it off early without penalties.
- Requires strict budgeting. The fact that you have to come up with one lump sum each month on a specific date and this consolidated payment is much larger than all of your smaller payments means you must be well-organized with your finances. If you are able to choose the date of your monthly payment, select a time of the month that works well for your situation -- for instance, a due date that falls near payday.
When you enter into a debt-consolidation loan with a clear understanding of what this debt-reduction method means for your financial situation, you can be more assured you are heading in the right direction when it comes to living a debt-free life.
About the Author:
Julie Bawden-Davis is a Southern-California-based writer specializing in personal finance and insurance. Since 1983, her work has appeared in a wide variety of publications, including Family Circle, Ladies' Home Journal, Parenting, Entrepreneur and The Los Angeles Times.