The number of people who are in debt is on the rise. It’s not uncommon for individuals to carry a balance on more than one credit card. Unfortunately, it’s sometimes difficult to repay multiple debts. If this sounds familiar, then it may be smart to look into debt consolidation.
What Is Debt Consolidation?
Debt consolidation lets consumers combine several outstanding debts into only one convenient monthly bill. The borrower usually takes out a single, larger loan with a consolidation company. This large loan is used to repay the borrower’s current debts.
Benefits of Debt Consolidation
Having several outstanding debts is cumbersome. Most borrowers intend on repaying their debts, but if they have too many at once, their debts may be difficult to manage. It’s not uncommon for borrowers to be late on payments or miss one altogether.
With debt consolidation, however, the consumer is left with only one loan. This makes it easier to keep track of payments. Some people even find they save money on interest. This is especially true with short-term loans. Most consumers are able to pay off their debts faster after consolidating.
Risks of Debt Consolidation
Debt consolidation doesn’t work in every case. If a borrower’s credit score is low, they may have trouble finding a lender to consolidate their bills. If they are offered a loan, it will most likely come with a high interest rate. In this scenario, debt consolidation will actually cost more in the long run.
Others may enter into a debt consolidation agreement without a financial plan in place. Before agreeing to consolidation, consumers need to make sure they’re able to make their payments on time each month. The penalties for making a late payment are often strict.
Change Financial Habits
Even if a person pays off their debts after consolidation, it’s still important for them to change their financial habits. Stop relying on credit cards to make purchases. Pay off any debts in full each month. Financial habits are difficult to break, and many people accrue new debt almost immediately.
Debt consolidation is often a wise financial decision for those who have several small debts. However, this option isn’t for everyone. You should read more information online to determine if consolidation is the right choice for you.