Debt consolidation is not a one-size-fits-all solution to your debt problems. While some people may benefit from a well-chosen debt consolidation loan, all consumers need to be aware of the risks these loans pose before taking on more debt. If you need financial help, talk to a financial adviser or credit counselor before you commit to a debt consolidation loan.
Positive: Lower Monthly Payments
With a debt consolidation loan, you get a loan from a lender and use the loaned money to pay back other loans you have. Debt consolidation loans usually, but not always, allow you to pay a lower monthly payment because the life of the loan is longer than your current loans. This means that even though the consolidation loan is for the same amount of money as your other loans, you pay less each month because the loan repayment period is spread out over a longer time.
Positive: Fewer Monthly Bills
When you consolidate your loans, you take several loans and transfer that debt to a new lender. This reduces the number of bills you have to pay each month. If, for example, you have five monthly credit card payments and take out a home equity consolidation loan, you no longer have to pay each credit card bill every month, merely the single consolidation loan. However, if you continue to use the credit cards, you'll soon have to pay those bills as well as the consolidation loan.
Negative: Higher Debt Costs
If debt consolidation loan companies allow you to pay less money each month, many people wonder how these lenders make money. They make money by extending the loan repayment term and, sometimes, by charging you higher interest than your current loans. Even if you pay less each month, you end up paying more money in the long term because you're paying interest for a longer amount of time. If you also have a higher interest rate on the consolidation loan, you could end up paying a lot more money than your original loans.
Negative: No Change In Habits
If your problems is that you too easily rack up debt, such as by charging too much on your credit cards and only paying back the minimum payment every month, debt consolidation can lead to even more problems. When you take a debt consolidation loan, you don't eliminate any debt. While the loan may allow you some financial breathing room, you still have to pay back the loan. You can't learn to get out of debt once you learn to stop taking on more debt than you can afford, and debt consolidation loans don't teach you how to do this.