The Positive and Negative Side of Debt Consolidation
Many people find that over time they have accumulated more debt than they can repay. When that happens, there is a reinforcing downward spiral. The inability to repay the debt leads to additional interest charges and penalties, making it still harder to repay the amount owed.
Debt consolidation is one means of stopping the snowball from rolling. Many people have considered this their best way out of debt and back to track financially. However, while there are a lot of positive aspects of debt consolidations, there are negatives as well. These should be considered before deciding if debt consolidation is right for your.
First, what is ‘debt consolidation’? At base, it’s a simple proposition. Gather all your multiple sources of debt into one debt and make a single payment every month to a single debtor.
But for that to be helpful several things have to take place at once. After all, whether you pay $150 $50 $25 to three debtors or $225 to another it’s the same amount. With online bill payment it isn’t even necessary these days to make out three checks. You aren’t even saving on postage stamps!
For debt consolidation to be beneficial one of the following must be a true statement: (1) consolidation will lower your monthly payment, (2) the interest you will repay will decrease or (3) the total amount of debt that you will repay will be reduced. Whether or not one or more of these is true is contingent on the type of consolidation plan you are looking into.
Best case scenario is for all three to be the case, but this is rarely possible. Normally there is a decrease in your monthly payment. This is helpful because it gives you the ability to meet the payment obligations every month.
That helps prevent piling more debt (interest and late charges) onto existing debt. You also have a much more relaxed frame of mind, knowing you can meet the monthly debt obligation without sacrificing other needed items.
The down side to this is that a lower payment can feed the faulty mentality that led to being overcome with debt from the beginning. You have extra money in your pocket and begin to think there’s no need to be concerned. You can revert back to a laid back attitude toward spending. Being overly concerned is not good. But a lack of concern can work against your ultimate goal of freeing yourself of debt.
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