No one wants to be in debt, and no one wants to struggle for money, but the truth is it happens, and in some cases it can get so bad the only option is debt consolidation. So what is debt consolidation and why do some people do choose to consolidate?
Debt Consolidation Defined
Debt consolidation is taking many small loans and repayments and paying them all off by creating one larger loan from a creditor. The debtor can then repay their loans quicker. This is particularly helpful if the smaller payments are difficult to manage and are not getting paid monthly or on time.
Creditors offer debt consolidation because the repayments over a longer period of time will make them a profit due to the interest, which accumulates over time. Generally people should only consolidate their loans as a last resort. However for some people, paying a little extra in the end can be a lot less damaging than allowing their debts to spiral out of control to the point of bankruptcy and being hassled by debt collectors.
As mentioned at the beginning of this article, consolidations does make a person’s payments more manageable because he or she will only have to focus on a single payment, and then the debt can become a little easier to fit into his or her budget. Thus, the biggest pro is consolidation can help the person’s credit score improve because all of those smaller payments show up as ‘paid off’.
However, it can be hard to get a consolidation loan: If the person’s debt is below or close to their yearly salary it is unlikely he or she will qualify. In addition, even if the person is approved to consolidate, there is still the issue of not being consistent with the consolidated debt amount, or not knowing how to manage future debts and not learning better habits. Most of the time there is a legitimate reason behind the excessive amount of debt, but sometimes it’s just due to massive overspending. Consequently, If people successfully consolidate their debts, and don’t stop making the same mistakes that caused the debt, then he or she will probably end up in a much worse position.
Key takeaways regarding debt consolidation
Moreover, debt consolidation is not the perfect answer, but for some people, it’s the only answer. In order for debt consolidation to have a positive impact on a person’s life the person must be disciplined. To learn how to foster better personal finance habits some suggestions would include destroy his or her credit cards, close unnecessary accounts, and make it impossible to spend at the same rate as he or she once did. Then, and only then, debt consolidation may help.
Do you think companies who offer debt consolidation should also require the recipient receive personal finance lessons?
This post was written by a guest post writer on behalf of Norton Finance. *Image Credit – Freedigitalphotos.net