Debt consolidation is relatively simple to understand; as the name implies, you are consolidating your debts. This means that instead of keeping track of multiple loans and multiple payments, you take out one large personal loan that assumes all of your current debt. This way, you only keep track of one loan and one payment with a single interest rate.

Debt consolidation can be helpful to assist in sorting out your debts. It can be too easy to make a late payment in a given year if you are trying to keep track of when each of your various six payments are due each month, and even one late payment can have negative side effects on that specific loan and your overall credit record. Of course, there is a lot more to debt consolidation than only keeping track of one payment.

What To Watch Out For

Before you consolidate your loan, it is important to know that the debt consolidation firms are out there to make a profit. You cannot just go and consolidate your loan without an extra cost. Some of the things that debt consolidation firms use to make their profit includes:

• Increasing The Payment Period: While the consolidation may offer you a smaller monthly payment than what you currently pay, they normally can only do this by extending your payment period. This means that you will stay in debt longer, and pay more in interest over the long term. A smaller payment may sound like a great benefit, but be sure you examine how much longer you would be in debt, and how much more you would be paying in interest.
• Increasing The Interest Rate: Consolidation firms sometimes will charge a interest rate higher than the weighted average rate of your other loans. However, they often disguise this by combining it with the first strategy. This way, the consolidation firm can charge you a higher interest rate for a longer period of time, and still offer “one low monthly payment.”
• Miscellaneous Fees: In order to process your loan application and get everything arranged, you will most likely encounter “application fees” and “administration fees”. Each one may not seem like much money at the time, but they can quickly increase your bill, making the consolidation plan much less attractive.

The FIDO website also has some great tips on what to watch out for when consolidating your debts.

Is It Right For Me?

The benefits to debt consolidation will vary depending on your personal situation. If you are relatively well off financially and can make your current payments, then debt consolidation probably isn’t for you. Conversely, if you are on the edge of financial ruin, a debt consolidation loan may be the only way to keep yourself out of bankruptcy. Before making the decision yourself, take some time to meet with a financial counsellor to discuss your needs and financial situation.

By taking time to meet with a local financial counsellor and exploring the added costs of debt consolidation (live longer in debt, pay more in interest), you can determine whether or not debt consolidation is right for you.

Photo by Garrettc

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4. Is Credit Card Debt Consolidation the Right Move?
5. Would a Debt Consolidation Loan Just Be Delaying the Inevitable?