The process of debt consolidation combines multiple debts into one single loan, typically resulting in a lower interest rate and monthly payment. A debt consolidation loan (DCL) provides the dual benefits of streamlining the repayment process while simultaneously lowering interest expense and the total amount repaid over time. If you are struggling with debt related to credit cards, medical bills or personal loans, it might be a good idea to consider debt consolidation.
Is Debt Consolidation a Good Idea?
Debt consolidation requires organization, patience, time and money. Organization means taking the time to itemize all bills – credit card, medical, utility, and other unsecured debts, and to total all necessary expenses – rent, groceries, transportation, etc. before determining the amount remaining that can be allocated toward a single monthly payment on a debt consolidation loan. In a DCL scenario, the debtor borrows sufficient funds to pay off a variety of unsecured debts (credit cards, medical bills, some student loans), thereby simplifying multiple monthly payments into one single monthly payment.
So, are debt consolidation loans a good idea? The answer, quite possibly, is yes. However, it isn’t wise to simply rush into a debt consolidation loan. After analyzing the terms of the DCL and clearly determining that the new interest rate and duration of it reduce your overall interest expense when compared to the blended interest rate on the existing pile of debt, it becomes crucial to take personal inventory. Are you trully capable of turning your back on the poor spending habits that led to accumulating debt in the first place? If you are, debt consolidation can be a good idea for you. If you aren’t, then a debt consolidation loan isn’t likely to work in the long run.
Old spending habits die hard. Therefore, it is important to consider whether you are the type of person who can exercise the self-discipline necessary to curb extra spending on restaurants, clothing, sporting events and other luxuries that simply need to be avoided until your debt problem is resolved. Taking out a DCL means taking out more debt – and so it is an absolute must that the funds from a debt consolidation loan be entirely allocated toward paying off pre-existing debt balances. If you lack the self discipline to do this and instead might be tempted to spend some of the DCL funds on “extras,” then debt consolidation is a bad idea for you. DCLs are good in that they provide a timeline and a pathway out of debt – but only if you behave responsibly.
Is Consolidating Credit Card Debt a Good Idea?
Interest rates on debt consolidation loans frequently are lower than those attached to credit cards, so for those individuals carrying multiple cards with multiple payment dates, utilizing a DCL to simplify the repayment process can make sense. Keeping track of multiple cards with multiple billing cycles can get messy and lead to inadvertent late fees and/or missed payments, both of which can harm a credit score and profile.
Apart from the convenience of streamlining the repayment process into one single monthly payment, the interest expense savings that can result from paying off credit card debt with funds raised through a debt consolidation loan makes good financial sense.. However, taking out a DCL obviously means taking out more debt – so only pursue this option if you will truly use all of the funds generated from a DCL to pay off your credit card debt. Then, you must maintain the discipline not to fall back into poor spending habits with your freshly paid-off credit cards.
If you are the type of person who can adjust and live frugally for awhile while acting responsibly, a debt consolidation loan can be a good idea. Furthermore, debt consolidation loans do not necessarily harm a credit score – on the contrary, they can be good for a credit score when a borrower makes regular, timely payments against the DCL. However, any late or missed payments will quickly damage a credit score and profile. Nonetheless, the potential benefits of debt consolidation outweigh the potential negatives. If you’re looking to simplify the repayment process on a number of unsecured debts while saving money on interest expense over the long term, and have the self discipline to allocate the funds generated through a DCL responsibly while continuing to curb your spending behavior, then debt consolidation can be a good idea for you.
About the Author: Steven Brachman
Steven Brachman is the lead content provider for UnitedSettlement.com. A graduate of the University of Michigan with a B.A. in Economics, Steven spent several years as a registered representative in the securities industry before moving on to equity research and trading. He is also an experienced test-prep professional and admissions consultant to aspiring graduate business school students. In his spare time, Steven enjoys writing, reading, travel, music and fantasy sports.