There are a lot of debt management services available today and one of the main services offered by them is debt consolidation. Debt consolidation is a debt management strategy which works by replacing all of your existing debts with a single loan from a lending company. What are some of the pros and cons of the debt consolidation strategy?
Debt consolidation usually offers a secured loan to replace the unsecured loans which has the effect, generally, of lowering the interest rate as any default is covered by the secured property and therefore a generally lower risk exercise for the lender. A secured loan is secured against something the borrowers have equity in - usually a house - it depends on how big the debt is.
Debt consolidation can be an appealing and useful way to better manage your debts, however, there are things that you need to be aware of when choosing and applying for debt consolidation loans. As with all financial deals and arrangements there are advantages and disadvantages. There are some good companies out there who offer realistic deals, however a lot of companies propose deals that appear to offer instant debt relief and these companies should be scrutinized carefully. Easy money is generally concealing the biggest traps. There are a few things you need to be aware of.
Firstly, debt consolidation does not cut down the amount of your actual debts. It more often than not increases the amount you actually eventually end up paying. Why? Because debt consolidation allows you to pay a lot less than you should be paying in exchange for longer payment period. Yes, it seems great in terms of weekly or monthly payments but the end bill will be much larger in the long run. Let's look at an example. Let's say you have three loans. A car loan which you are paying off at $300 per month for 3 years. A personal loan which you are paying off at $150 per month for 2 years and a school loan which you are paying off at $50 per month for 3 years. A debt consolidation loan could be put in place that puts all three amounts into a single loan which you pay back at $400 per month for 4 years.
Individually the three loans would have cost you $10,800 + $3,600 + $1800 = $16,200. With the debt consolidation loan you would end up paying $19,200. You would have easier monthly payments but end up paying off a higher total.
The key piece of advice then is to look at two main figures to make sure the debt consolidation agreement is right for you. One is the amount of weekly or monthly repayments and the second is the total figure you end of paying. Don't be fooled by small repayments that can end up costing you a lot more in the long run.