Debt consolidations is really when you're
taking a lot of different debts and your consolidating them into one loan or one payment and there's
some good things about debt consolidation and some not so good things. So, let's start with the benefits, a lot of
times when you're trying to manage a lot of different debt it can be overwhelming. So there could be some real benefits in consolidating
things into one payment, that's a benefit. You also may be able to get a lower interest
rate then some of your individual debts have, so you can potentially lower the interest
rate.
And sometimes you can stretch out that payment
in such a way that your monthly payments are lower. So those are all the good sides of consolidating
debt, simplifying your life so that you can focus on it and make progress. What's bad about consolidating debt? Number one, when you consolidate debt, sometimes
you're just moving debt around and you're not focusing on the real issue. I've seen this a lot with people, they consolidated
all their debt into one place and then some of the other debts start coming back. Right, so they're moving debt around but they
are not necessarily paying it down. Another challenge when it comes to consolidating
debt is sometimes I see this a lot with home equity loans that people might have, they
consolidate a bunch of credit cards onto a home equity loan. And there are some real benefits there but
what are the draw backs? If they can't make their home equity payment,
their house is now at risk. Keep that in mind, if I couldn't make my credit
card payments, no one can come take my house.
So sometimes you're putting collateral at
risk by consolidating. Third, a lot of time people consolidate all
of their debt and they stretch it out over a long period of time. And anytime you stretch debt out over a long
period of time, yes it's lowering what you're paying each month, but sometimes you may pay
more in interest over the long term, simply because you're stretching out the debt so
long. So keep that in mind, when you're consolidating
debt, ask about how long the loan is, that's no different if you were getting a four year
car loan instead of an eight year car loan, yes your monthly payments are lower but over
the long term you pay a lot more. Debt consolidation can be a great strategy
or it can be a terrible strategy depending on your situation.
So you want to make sure you evaluate all
of these pros and cons that we're talking about to see if it makes sense for your situation..