The process of getting into debt can become a vicious cycle. You may lose track of all of the debts you have incurred, and therefore, you will probably feel out of control and powerless to improve your situation. While many in this position consider filing for bankruptcy, debt consolidation can be a good strategy depending on the situation.
Debt consolidation is the act of moving different debts in one single, lower-interest loan. This means that the interest rates will be easier to pay and easier to manage; therefore, repaying the debts will become more realistic. However, debt consolidation is not necessarily for everyone. The following are some of the pros and cons of debt consolidation so that you can decide whether this debt relief strategy could help you.
What are the advantages of debt consolidation?
Many people suffer due to extreme interest rates on credit cards, meaning that they can hardly even keep up with the interest, and therefore, have no possibility of repaying the debt. By consolidating debt, the interest rate will be significantly reduced, and you can put more funds into debt repayment.
Additionally, your credit score may be set to benefit from debt consolidation. By moving your credit card debts into a different loan and repaying the debt faster, you will have a lower credit utilization ratio. This means that you will be using less of your available credit, and this will lead to a credit score boost.
What are the disadvantages of debt consolidation?
In order to truly benefit from debt consolidation, you need to have willpower. This is because debt consolidation will free up available credit on your credit card. If you start accumulating your debts on your card again, this will only lead to further financial problems.
Debt consolidation is also only worth doing if you are able to get a significantly better interest rate. It is also important to look at the fees associated with the loan. By comparing the cost of credit card fees with the loan fees, you will be able to evaluate the prospective benefits.
Being in debt can sometimes seem hopeless, but there are many options for struggling debtors. Debt consolidation is not for everyone, so make sure that you look into all debt relief options available to you.