Debt Consolidation - Is It Really The Best Option For
You?
By
Roy Thomsitt
It
is a very common question that people pose to themselves
across the English speaking world: should I consolidate
my outstanding debt? There is no single answer to this
question, as no two people have identical finances and
other personal circumstances. There are also other factors
that come into play that can affect the right or wrong
of your decision.
In
deciding whether to opt for debt consolidation you should
take into account the following:
Financial
Savings
Being
able to save money is, or should be, an important factor
in deciding whether to take out a debt consolidation
loan. Typically, people who are considering consolidation
will have multiple debts which include one or more with
high interest rates. This particularly happens when
loans are taken out during a period when market interest
rates are high. The borrower sees cheaper loans advertised
when the market rates decline, but the rates of his
loans are fixed at a high level; it is therefore an
immediate temptation to switch to one cheaper rate loan
and to make interest charges and monthly payments cheaper.
Another
type of debt that will bear a high interest rate is
credit card debt. It can be attractive to consolidate
such debt with any other loans, so that they can be
paid off in one monthly payment at a lower level than
the current loans added together.
The
lower monthly payments give the impression that you
are making savings when opting for debt consolidation.
However, that apparent saving may be due to a longer
term of loan. You do need to make sure you are actually
making a saving. You can do this by checking the total
annual interest charges for your existing debts, and
compare them with what they would be under a new consolidation
loan. Only by reducing your interest charges will you
be making a true financial saving.
When
calculating any saving, be sure to take into account
any charges made by the new lender, and any penalties
you may suffer through paying off other loans early.
Such costs can be critical in deciding whether there
are any financial savings.
Improving
Your Cash Flow With Debt Consolidation
Debt
consolidation can bring great relief to your monthly
cash flow, if done properly. So, whether it is personal
debt or business debt that you are consolidating, you
are given an opportunity to put your finances in better
order.
Reducing
Stress When You Consolidate Debt
Your
level of stress can increase steadily if your finances
are in poor order, and each month you find it more difficult
to meet loan and credit card repayments on time. If
you consolidate your debt you should be able to get
the monthly repayment to a more affordable level, thus
reducing the potential for stress as you struggle to
make a lot of monthly repayments. You may also avoid
the hassle of creditors chasing you, by preventing yourself
from falling behind with payments.
The
Affect On Your Credit Report If You Consolidate Debt
The
precise affect on your credit report or status when
you consolidate debt will depend on your location. Your
new consolidation loan will be recorded, but so long
as you maintain your payments, on time, for the duration
of the loan, then you should emerge at the other end
with a decent credit standing. However, deciding not
to consolidate debt may adversely affect your credit
status if you subsequently default on any of your loans
or credit cards.
The
above are just some of the factors that should be taken
into account in a decision to take out a consolidation
loan, and it is wise to consider everything fully before
deciding. If you decide to go ahead, then shop around
for the best deal. That will help you for many years
to come.
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