Debt consolidation taking out a loan in order to pay off other loans. The selling point of debt consolidation is that it is easier to manage paying of only one debt consolidation loan and it lowers the interest that would have been paid out on the smaller loans. If done smart, debt consolidation can present a viable option for some situations.
Debt consolidation is common in individuals seeking to get rid of many small loans such as student loans, car loans, and credit cards, coupled with others. It is also a common fiscal policy in debt ridden countries, mostly in third world or developing countries who are looking for means to reduce government debts. However, most of this is usually political and with the aim of securing funds for development promised during political campaigns. This however plunges the country into a very long term debt.
Consolidating all your credit cards to one lender is a very attractive selling point to such service providers. But most people who end up consolidating debts are likely impulsive borrowers and may end up getting other loans in the long run. credit consolidating may give you short term financial and emotional relief but in the long term one will lose confidence on financial independence and most likely fall back to acquiring even more loans. This is from a psychological view.
To provide lower interest rates, companies offering debt consolidation services will only offer a secured debt consolidation loan. This puts your property at risk if payment is defaulted. You could lose your house, car or whichever asset was used as security. Also, by offering one lower monthly payments, the loan repayment will be spread out over a long period of time and one ends up actually paying more to the debt consolidation lender. They interest rates are also low because of the stretched out repayment period.
The debt consolidation lending companies will also advertise their service very attractively and in some way will mislead the consumers. Seeking expert advice is always recommended as debt consolidation may involve unforeseen extra costs in the long term which may end up making the debt situation much worse. Reduction of credit cards is all about reviewing one’s spending and saving habits. Unnecessary small amount debt consolidation loans with high interest rates are really not the way to go.
If you decide to take the path of debt consolidation, be sure to do accurate calculations of the total amount to repay and see if it is the best option.