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NOT A “MAGIC BULLET”
(Aug. 11, 2020) — Are you trying to figure out the debt consolidation pros and cons? Read this article to learn more about consolidating debt.
Personal consumer debt is enormous in the United States. How enormous? The total consumer debt is around $14 trillion.
Since the size of that number makes it all but meaningless, let’s bring it down to the individual level. The average personal consumer debt hovers at a little over $90,000.
That debt gets spread out across credit cards, mortgages, and other kinds of loans. It’s no wonder that so many people consider debt consolidation options.
Of course, debt consolidation isn’t a magic bullet. There are debt consolidation pros and cons you must consider. Keep reading for the big pros and cons you should keep in mind.
Pro – Simpler Monthly Finances
With debt spread out across 5, or 8, or even more creditors, keeping track of what payments are due at what time can prove difficult. Missing a payment is easy under those conditions.
Debt consolidation combines all of those debts. You make one payment each month and that’s it.
Pro – Reduced Interest Rate
A lot of consumer debt sits on credit cards, which often carry interest rates of around 20%. That means you rack up a lot of interest over time on the principal balance.
With debt consolidation, you typically pay a lower interest rate on the loan. The exact number will vary based on standard factors like credit score, total income, and your income-to-debt ratio.
You should make sure you work with a BBB accredited consolidation company. You get more details here.
Pro – Quicker Debt Payoff
With credit cards, in particular, the debt fluctuates with no clear endpoint. Debt consolidation gives you a clear schedule for when you will pay off your debt. Since you typically get a better interest rate, you also pay down the principal faster.
Con – It Won’t Solve Bad Financial Habits
Debt consolidation can clear away a lot of existing balances. That won’t solve poor financial management. If you begin immediately putting debt back onto your credit cards, you’ll end up in an even worse position in no time.
If you’re wondering, “Is debt consolidation a good idea,” the answer is no if you can’t change your financial habits.
Con – Fees
Like other loans, debt consolidation comes with a number of fees. A few of the more common ones include:
- Origination fees
- Balance transfer fees
- Closing Costs
In a sense, you take on additional debt in order to get your original debt under control.
Evaluating Debt Consolidation Pros and Cons
Evaluating debt consolidation pros and cons means taking a hard look at your finances and yourself.
Debt consolidation can help you get interest rates under control. It can also help you bundle a number of individual payments into one payment, which simplifies your finances. You also get more bang for your payment buck in terms of reducing your principal.
Debt consolidation means taking on some extra debt in terms of fees, which can make some people uncomfortable. It also requires a lot of self-discipline not to rack up additional debt on credits cards that suddenly have zero balances.
Looking for more personal finance tips? Check out some of our other personal finance articles on this site.