Pros and Cons of Debt Consolidation

Managing your money is not an easy task for most people. At one point or another, one is compelled to take a loan from the bank for personal or professional needs. People who belong to the middle class have multiple loans. However, debt consolidation could be a good option if paying your high-interest loan amount feels burdensome. It is a tried and tested solution for money management.

What is debt consolidation?

One of the best ways to manage your finances and take care of the various bills you pay is through debt consolidation. Consolidating debt is the process of combining several debts into one. It is a strategy for managing money where you can take out a new loan to pay off all the current loan amounts. As a result, you only have to pay one debt amount rather than several. One advantage is that you can return the loan at a lower interest rate, which saves you money on EMIs and helps you effectively manage your finances. Now that you know what it means to Consolidate Debt, let's evaluate the pros and cons of doing so.


Lower Rates of Interests - The interest depends on the loan amount, length of time, and credit score. However, if people Consolidate Debt, they will likely have to pay a lower interest rate. So, they need to repay less money and manage their finances better.

Reduces the chances of missing the payments by streamlining finances - If you have taken out multiple loans from the same bank account, there are chances of forgetting or failing to pay monthly instalments at the time. By streamlining finances, debt consolidation helps ensure you do not miss payments. You will have to pay only one EMI. Thereby, the chances of incurring late payments get reduced. 

Improves Credit Score - There are chances that your credit score might decrease by applying for a debt consolidation loan. However, over time, your credit score will increase significantly. The reason is that you will have to pay only one loan amount, and it's easy to make payments this way. The history of your past payments is an imperative factor in determining your overall credit score.


Does not tackle primary financial problems - Consolidating debts does not help solve the core financial problems. Instead, it just streamlines your finances and debt repayments, which makes it easier for you to manage money. But still, you will have to pay a monthly EMI. Therefore, there will be little effect on solving financial issues. 

More chances of missing payments - The chances of missing payments can increase because all your debts get merged into a single one. Therefore, the amount of EMI you are paying might be more too. So, if you miss one payment, it can lead to a hefty late payment fee. Therefore, it could easily land you in more debt, and you might incur more losses.

You may not get a low-interest rate- The interest rate you receive from the bank depends on your credit score. So, if you do not have a good credit score, debt consolidation will not help you much. You will not be able to qualify for a lower rate of interest. Moreover, even if you qualify for a lower interest rate, you might pay more in interest. So, think it through as the repayment timeline starts fresh once the debts are consolidated.
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