Debt consolidation combines all your separate debts under a single debt umbrella. This is commonly done with a debt consolidation loan, a loan that has the specific purpose of being used to pay off your debts. This is usually the debt repayment option considered by many before getting to the point of declaring bankruptcy. Let’s consider the different ways of consolidating debts along with the pros and cons.
Ways of Consolidating Debts
There are different ways of consolidating debts that do not necessarily involve getting a special loan. If you have a credit card with a high enough credit limit, you can use a balance transfer to put all your debts onto that single credit card. Other common ways of consolidating debts involve combining credit card debt with your mortgage, taking out a second mortgage or home equity loan, or using a student loan. No matter which method you use, the goal is to combine all your debts into a single loan.
Pros of Debt Consolidation
- Lower monthly payments. By spreading your payments over a longer period of time, consolidating debts usually brings a lower monthly payment. The lower payments help ease a tight budget.
- Lower interest rate. With debt consolidation, you should aim for a lower-rate loan or credit card. Lower interest means lower cost of debt overall.
- Easier to manage debt. You only have one debt payment to manage rather than several different ones.
Cons of Debt Consolidation
- Your home is at risk. When you secure your debt with a mortgage or home equity loan, you risk foreclosure if you fall behind on your payments.
- The higher cost of the debt. While extending your debt over a longer period of time can lower your payments, it also increases the cost you pay for the debt.
- You may need a co-signer. If your credit score has already been hurt by late debt payments; you may not be able to qualify for the loan without someone who’s willing to co-sign for you.
Is Debt Consolidation the best solution?
Using debt consolidation is a viable option if you can do it at a low cost, without risking your assets or the assets of others.
Taking a close look at the pros and cons of debt consolidation puts you in a better position to decide whether to consolidate your debts. Though debt consolidation can make it easier to pay off your debt, it doesn’t solve actually solve your debt problem.
After consolidation, make sure you change your bad spending habits.