Many people find that over time they have accumulated more debt than they can repay. When that happens, there is a reinforcing downward spiral. The inability to repay the debt leads to additional interest charges and penalties, making it still harder to repay the amount owed.
One common suggestion for breaking this vicious circle is to employ debt consolidation. For thousands, this has seemed like the way out, the way back to financial health. But there are pros and cons to debt consolidation, no matter what form it takes. Being aware of those will help you decide if it is the salvation in your particular circumstances.
What does it mean to consolidate your debt? It is very simple. You turn your multiple debt into one debt and make one monthly payment to one lending institution.
But for that to be helpful several things have to take place at once. After all, whether you pay $150 $50 $25 to three debtors or $225 to another it's the same amount. With online bill payment it isn't even necessary these days to make out three checks. You aren't even saving on postage stamps!
In order for debt consolidation to be useful one or more of the following has to occur: (1) either the total monthly payment has to decrease , or, (2) the net amount of interest has to decrease, or, (3) the actual total debt has to go down as a result of consolidation. Which, if any, of these take place depends on the specific debt consolidation plan you have planned.
Best case scenario is for all three to be the case, but this is rarely possible. Normally there is a decrease in your monthly payment. This is helpful because it gives you the ability to meet the payment obligations every month.
By meeting your payment obligations you avoid additional interest and late fees. It also gives you the peace of mind in knowing that you are making your monthly payment while still being able to care for your other needs.
The risk is that if the payment is too low, some of the psychological factors that led to excessive debt in the first place can rise again. Thinking you have lots to spare can cause you to relax too much too soon. Continual worry is not healthy, commitment and concern are - if your goal is to become debt free.
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