Debt consolidation has a lot of advantages, but it isn’t always a good idea.
The convenience of having only one monthly payment won’t be worth it if you’re paying more in the long run.
Once all of your other accounts are paid in full, there is only one payment to make every month – the one to the new lender.
Since the interest rate on a personal loan is often considerably lower than on a credit card, and the repayment term potentially much longer, the consolidated payment may be much lower, as you indicated.
Ideally, that new debt has a lower interest rate that makes payments more manageable or lets borrowers pay off the total more quickly.
Many people try debt consolidation, but not all emerge better off.
Arnold Graf, a certified financial planner with NEBSCO Financial Services, says debt consolidation may be a good idea for people who have sufficient equity in property and are credit worthy, but adds “usually people that consolidate are close to bankruptcy and are trying to push their debt further out as long as they can.” Consolidating debts is basically just buying time, he says, adding that “you have to consider whether you are willing to pay less now but for a longer period of time.” Gail Cunningham, a spokesperson for the National Foundation for Credit Counseling, says, “Debt consolidation is always a good idea on paper.
Consolidating debt may be a good idea if you fall into one of two categories: If you’re unable to make the payments on your current debt, this could harm your credit score and lead to penalty fees for missing payments.
Whether consolidating your debt is a good idea depends on both your personal financial situation and on the type of debt consolidation being considered.
Consolidating debt with a loan could reduce your monthly payments and provide near term relief, but a lengthier term could mean paying more in total interest.
So the first step in debt consolidation is simply to consider whether it will actually work for you.
There are many ways to consolidate your credit card and other debt, such as with a 0% APR credit card, a home equity loan or a personal loan.