Debt consolidation has become very popular of late as a strategy to reduce debts and improve the borrower’s financial position. Numerous individual’s are trying to consolidate their debts in a belief that debt consolidation is the answer to all of their financial woes.
As with everything in life, things are not necessarily what they appear to be in an advertising. Debt consolidation can be very helpful to some but may be detrimental to others.
Will your repayments be lower?
The mere process of putting several debts into a single facility does not guarantee reduced repayments. In fact before proceeding with a debt consolidation it is important that you verify whether the consolidation is going to achieve reduced repayments or offer some other form of saving. Simply putting several debts into a single loan does not automatically guarantee saving. However if consolidation will take the form of a debt agreement for example, then lower overall repayments are a distinct possibility.
What about the cost of debt?
It is important to consider not only the amount of periodic repayment but also the overall cost of debt. You do not want to be on a lower interest rate but to spend 20 years repaying a debt that you would otherwise repay in 5. What will the annual interest cost be? How many years are you looking to keep up these payments?
Will debt consolidation affect ability to borrow?
Debt consolidation will not affect your ability to qualify for other forms of finance if that debt consolidation is a new loan. Your ability to borrow further will be determined by your income levels and outgoings. However if you end up entering a debt agreement in order to consolidate your debts, then you are effectively admitting to your creditors and potential other lenders that you are insolvent and can not afford existing debts. Naturally this will preclude you from being able to borrow further for quite some time.
Is becoming debt free sooner a fallacy?
When it comes to debt consolidation loans, a cost effective form of debt consolidation should assist to reduce your periodic repayments and thereby help you repay the debt principal out sooner. However if becoming debt free sooner is a goal it is important that you make every effort to make extra repayments to reduce the debt principal faster.
When it comes to debt agreements as a means to consolidation, these only incorporate unsecured debts. You can become free of unsecured debts at the expiry of the debt agreement. However any secured loans that you hold will still need to be attended to independently of the debt agreement.