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Pros and Cons of Consolidating Debt

Should You Consolidate? This guide will help your work out whether you should.

Pros and Cons of Consolidating Debt

Pros and Cons of Consolidating Debt

Unfortunately, debt is no stranger to Australia. 2011 credit card statistics from the Reserve Bank of Australia show that there are 14.85 million credit card accounts open in Australia. The average credit card balances in the country total to $49.4 billion.

In light of these cold, hard facts regarding personal debt in Australia, it's clear that many Australians could benefit from consolidating their debt. Debt consolidation is a process that takes multiple debts, including medical bills, credit cards, personal loans, and other lines of credit, and combines them into one monthly payment.

There are many credit counselling agencies that provide debt consolidation services. Most people seek out debt consolidation when their personal debt becomes unmanageable and difficult to organize month by month. When this happens, debt can become even more insurmountable as interest rates skyrocket and penalties and fees add to the debt when it is not paid off on time.

Before you decide if debt consolidation is right for you, it's important to consider the pros and cons.

Pros of Debt Consolidation

  • Lower Interest Rates: One of the biggest attractions of debt consolidation is that you are able to reduce interest rates on all outstanding debt by negotiating with your creditors. This can be done through the use of a debt consolidation firm, which manages negotiations on your behalf.

When you use debt consolidation to lower monthly interest rates, it can save you money spent on unnecessary interest each month. This money can then be used to pay down the principal of the debt so that it is eliminated even quicker.

  • One Monthly Payment: When debt is consolidated, you will only have to make one single monthly payment for all loans directly to a debt consolidation company. Some people can find this much simpler and can save time for many people who have difficulty organizing payment for multiple loans each month. One monthly payment may also help to prevent late fees or missed payments since the debt will be paid in one lump sum.
  • Repayment Plan: A debt consolidation company will work on your behalf to create a repayment plan so that you will no longer miss payments or default on loans. This will help to manage large amounts of debt by breaking it down into a monthly payment cycle with the end goal of eventually paying off the debt in full.
  • Eliminate Late Fees: If you default on a loan, you will end up owing even more money thanks to penalty fees, late charges, and increasing interest rates. But when your debt is managed through a debt consolidation program, these late fees can be greatly reduced or even eliminated altogether through the negotiation process.
  • No More Calls from Collectors: If you are in serious debt and have been receiving call after call from collection agencies, debt consolidation can take care of this problem for you. You will be required to sign a power of attorney over to a consolidation company, so your creditors will no longer be permitted to contact you directly. This will save you from creditor harassment and will allow you to focus on what is most important - managing your finances in order to pay off your debt.

Cons of Debt Consolidation

  • Possible Loss of Assets: Debt consolidation requires you to take out a secured loan using collateral, like your car or house. If you are not able to pay off your debt in the consolidated monthly payments, you could potentially lose your home.
  • May Take Longer: When your debt is consolidated, you still owe the same amount of money. However, you will agree to pay off the debt in one monthly payment that you can manage over the long term. For most people, this means it will take much longer to pay off their debt. But if your debt has spiralled out of control, this can be a better alternative to defaulting on loans and increasing your debt month by month.
  • May Get into More Debt: Since you will no longer be repaying multiple debts and will eliminate debt from your credit cards, many people are tempted to fall back into bad spending habits if they don't assess and budget correctly. For this reason, debt consolidation should be a tool to use to manage sizable debt, but it should not be the answer to financial troubles. Debt consolidation should only be used hand-in-hand with a monthly budget that you stick to so that your spending stays on track.

As beneficial as debt consolidation may be to manage an out-of-control financial problem, it's important to understand that the majority of the time, debt will grow back if you don't change your financial perspective. Even if you are able to consolidate your credit card debt successfully, it's even more important to create a budget and financial plan that you can use in order to avoid creating more debt in the future.