What Is Debt Consolidation? | Financial Terms

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..

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