Home » Debt Solutions » Debt Consolidation - The Pros and Cons

Debt Consolidation - The Pros and Cons

It's a nightmare that touches many people's lives: being up to one's eyeballs in debt. Many people get so far into the hole of debt that they never learn how to get out; yet others attempt to get out debt—via debt consolidation, for example—but don't properly understand or manage the process, and end up driving themselves even further into debt.

The consequences can be life shattering: losing your home, going without health insurance, leaving no inheritance behind, ruining personal and professional relationships, and a slew of other horrible events may accompany an out of control downward spiral into debt. Yet, there are ways in which people can successively climb out of that hole, and, with proper, professional consultation, debt consolidation is a very effective option available to just about anybody in debt.

Understanding Why You're Here

The most important step in getting out of debt is understanding how you got to where you are. Facing the reality of your situation might be painful, but it is entirely necessary. Most people that have heavy debt have been living beyond their means, and therefore there is a larger need to change basic attitudes and ideas in order to really realize the major changes they need. Not doing so could simply provoke a reincidence, sliding back down the slippery slope of debt right when you thought you were out and in the clear.

Get Free Consolidation Advice for Your Debt

Get consultation from professionals on your financial situation to help you appreciate the reality of the position you are in; you can do so for free at many non-profit financial consulting firms. A couple of a good sites to start at would be MyDebtConsolidationAdvice or 3DebtConsolidation. You may also want to read our article, "Learn to Change Your Spending Behavior."
Remember, there is an abundance of organizations out there offering completely free consultation services in this regard, so don't go paying for it when you've got more important bills!

Pros and Cons of Debt Consolidation

Let it be clear: consolidating debt isn't the right step for every debtor. It is quite far from the ideal solution to debt problems, but then again, debt problems can grow in such a form—especially for those with:

1) Destructive spending habits
2) A predicament that absolutely obliges them to spend more money than they have, like a disease or legal costs-that there really is no ideal solution.

All in all, consolidating one's debt is for those that simply cannot handle paying the high interest rates of various simulatneous loans, do not have the discipline to keep up with several repayment processes, or otherwise cannot sustain the debt predicament they currently face.

Advantages of Debt Consolidation

The beauty of consolidating debt is that those tremendous interest rates can be renegotiated and you can end up having a surrogate to whom you make one lump payment, and who in turn forks over successive payments to your original lenders. This is what is referred to in the industry as a debt management program (DMP).

Makes handling payments a lot easier, and may help to take control of your finances.

Owing money to just one lender as opposed to multiple can be lot less stressful.

Disadvantages of Debt Consolidation

in reality, only about 35% of people needing to get their debt payments on track will benefit from one. In the end, you might just end up paying someone else to make payments with your money. Better yet would be to learn some discipline, and renegotiate with your lenders yourself (based upon sound, free financial advice) and stay on top of all your payments.

Another drawback to debt consolidation is that it is often referred to as a quick fix: you'll reduce your payments, but you'll probably drag out the total period of repayment. For some people, that's OK; others prefer to get out of debt the sooner the better, and will withstand the agony of tough payments to accomplish that goal. Again, it's all about personal circumstances here.

Avoiding the Myths

Sadly, there are always unscrupulous souls out there willing to prey on the destitute, the broke, and the suffering. Sometimes, especially among those buried under mounds of debt that life has become a living hell, debtors can become so starry-eyed and credulous about consolidation programs and other debt services that they can get lured into deceptive ploys that, though perhaps not illegal, will by no means help the situation.

One myth says that a DMP (debt management program) will help your credit rating: whereas if you've performed dismally up till now on paying your bills on time, and therefore have an already affected credit report, a DMP won't hurt you (and may extract a more amiable attitude from your creditor); but if you've been staying on top of payments until the moment, a DMP will hurt you. In either case, it never helps.
Another persistent myth is that a DMP will save you money: in the end, this is impossible. The reductions you will see in your monthly payments are simply possible because the remainder has been included back into the original amount owed, and you will pay it in time. Hence, in the long run, it is only possible for a DMP to occasion even more costs, though this may be the only option for people on tight monthly budgets.
Also, beware of ads for “super low” interest rates, as the market is pretty uniform on this subject, and false advertising is rampant. Again, the starry-eyed beware.

Using Debt Consolidation Tools Wisely

Any financial advisor will tell you that, no matter what tool you're using to consolidate credit card debt, mortgage debt, medical bills, etc., make sure you thoroughly understand it and have read all the fine print. As always, the changing or inclusion of just one or two words in a contract can totally alter the spirit and specifics of an agreement.
There are possibilities such as taking a home equity loan, taking a loan out against your retirement fund or your life insurance benefits, but it is important to know the consequences of doing so.
In the case of taking a loan out on your life insurance, whatever you fail to pay off will be taken from the eventual payouts to family members upon your death; therefore, not paying might hurt the next generation of your family. These kinds of consequences must be taken seriously.
Likewise, taking a home equity loan may get you stuck in a quagmire, as your lender is unlikely to want to speed up the repayment process, meaning you'll have a long road ahead.
Use credit unions, as they usually offer low interest rates; if you're not a member of one yet, find out your eligibility via a spouse, child, parent, or other family member. You can find nearby credit unions at CreditUnionsOnline.
Lastly, there is the possibility of taking a loan from a family member or friend; be careful with this one, and make sure everything is put in print. Many people that go down this path agree that there is no better way to ruin a good relationship.

Further Resources

Take a look at BankRate's guide to debt consolidation, with tons of helpful tips on how to combine debt payments as well as other good ideas; it's available at Bankrate.com.
As always, check for indications of trustworthiness wherever you seek free debt consolidation services, such as a BBB (Better Business Bureaus) logo, etc.

Written by the Survival Insight Writing Team

Add your comment

Share
Comment
Print Article

Your name:
Subject:
Comment: