Although trying to reduce the number of debts you owe is not such a bad idea but knowing when to do so is essential if you don’t want to end up with more debts.
Debt consolidation is simply a way of reducing the amount of debts one owes by securing a substantial loan from a loan providing institution to settle the smaller debts. As a result instead of having to pay for so many debts, you are now faced with paying for the loan you obtained. This way the number of payment you have to make at the end of every month is drastically reduced and you don’t have to worry about forgetting to pay one of your bills. This debt repayment option is considered very beneficial because it offers you flexibility in managing your debt and can also help you reduce the interest rate that may accumulate from having to pay numerous debts but just like every other debt management initiative, sometimes it may not be the right route to take in certain situations. Below are some of the cases when debt consolidation may not be the right option.
Bad money habits
Obtaining a consolidation loan can be seen as one way to reduce an extreme financial burden on anyone and secure more time for repayment. Even though this is true yet it doesn’t always work for everyone especially for those who have bad money habits because it will only lead to greater financial distress. For such individuals it is advisable to critically check your money habit while closely examining those situations that lead to the consideration of debt consolidation as an escape route. This will enable you know if debt consolidation is right for you.
Taking out home equity loans
A very popular form of debt consolidation involves the conversion of an unsecured debt to a secured debt. This unsecured debt may involve your credit card bills and other similar debts while a secured debt usually involve a mortgage payment especially for your home. In debt consolidation, sometimes you may want to transfer all your unsecured debt to a combined mortgage payment in order to reduce the number of debts you owe. Even though this may seem an attractive option, it is usually very risky because this method demands that you take out a home equity loan. It is advisable to think hard before taking this step because unlike unsecured debt, failure or default in payment may lead to loosing your home.
A debt consolidation can also have a negative impact on your credit score. Depending on the age of your account, you may not need to consider other options of debt repayment. However older accounts are more likely to be positively scored if found credible with good record. So it is advisable not to proceed with debt consolidation if you have got a good credit score, instead you can look for a better way to manage your account in order to offsets your debts. This is because consolidation loans require that you close all old accounts and start a new one and this restricts you from saving any other money elsewhere until you have fully paid off the loan. In some cases the introductory rates, accumulated interest and the period of payment may not be to your own interest.
In conclusion, debt consolidation can be very beneficial as a means of debt repayment because of the flexibility, time and possible lower interest rate it can offer but always evaluate your position at every moment to know if it is the right option for you.
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Last update on 2017-03-27 / Affiliate links / Images from Amazon Product Advertising API