Is Debt Consolidation Good or Bad?

Is Debt Consolidation Good or Bad? Learn About its Pros and Cons

If you have a lot of debts to pay off, then you might be thinking about its pros and cons. The following article aims to explain the good and bad points about debt consolidation.
WealthHow Staff
Last Updated: Jun 3, 2018
Debt consolidation involves taking one loan to pay off multiple debts, which you might be having. One of the most important advantages regarding these loans is: making only one payment, rather than multiple ones for each of your debts. Moreover, the rate of interest may be lower compared to the other debts, for which you have been making payments. You can either opt for secured or unsecured debt consolidation, and one of the most important advantages of the former is that, the rates of interest are lower. Financial institutions usually require that you serve a collateral, which is usually your house, if you own one.

Pros

For example, you have five credit card bills to pay each month, along with a car loan, which makes a total of six bills. And on top of that, you have a couple of late payments on a couple of these cards. You take a debt loan, which equals the total amount of debts that you have, and pay off all of them. Thus, you only have to make a single payment for the loan, which you just took. When debt is consolidated, the installments that you pay each month are considerably less. Moreover, with timely payments each month, you have the advantage of further improving your credit score. Hence, it may be considered good only if you are sure that you will be able to make all payments on time. Moreover, you should also look at the teaser rates, which are also called introductory rates, as they may be higher after a certain period of time. Also, you need to ensure that the same interest rates apply throughout the term of the loan. Debt consolidation and making payments on time gives you an opportunity for credit repair so that you gain all the benefits of having a good credit history.

Cons

Being approved for a debt consolidation loan can be tough, as banks and financial institutions go through your credit history before approving the loan. If you have not made payments on time, then you may be charged a higher rate of interest. The amount you pay might be lower, but if you make long-term calculations, the same amount will be considerably higher. Moreover, there are several debt consolidation companies, who provide debt advice to attract customers, by promising to work with your financial provider. No doubt, you pay a lower amount, but a part of your payment goes to these companies, and you may end up paying more. Hence, it's better to deal with the bank directly whenever possible.

Consolidation vs. Bankruptcy

Filing for bankruptcy can give you a chance of rebuilding your credit all over again. But, the red mark on your credit rating would remain for as long as ten years. Moreover, even if you file for bankruptcy, the government may try to possess the assets you have, depending on the kind of bankruptcy that you are applying for: chapter 7 or 13. No doubt, you can substantially improve your credit score even after this situation, but once you file for it, the chances of financial institutions approving a loan are less. Hence, if there's a chance that the government may freeze your assets, then it's better to go for debt consolidation. However, having said that if your debts are substantial, and if you find that even after going for bad credit loans, you may not be able to make payments on time, it's better to go for filing bankruptcy.

Thus, debt consolidation has its own advantages and disadvantages. Hence, you need to look at its pros and cons, before deciding to go for it. Always go through the terms and conditions before you accept them so that you know the amount that you will pay each month, and for how long you'd be paying.