Consolidate Debt? Is It Really The Best For You

It is a very common question that people pose to themselves across the English speaking world: should I consolidate debt? There is no single answer to this question, as no two people have identical finances and other circumstances. There are also other factors that come into play that can affect the right or wrong of your decision.

In deciding whether to consolidate debt you will probably need to take into account the following:

Financial Savings

Being able to save money is, of course, an important factor in deciding whtether or not to consolidate your debts. Commonly, people who are considering debt consolidation will have multiple debts which include one or more with high interest rates. This particularly happens when loans are taken out during a period when market rates are high. The borrower sees cheaper loans advertised when the market rates decline, but the rates of his loans are fixed; it is therefore an immediate temptation to switch to a cheaper rate loan and consolidate debt to make interest charges and monthly payments cheaper.

Another type of debt that will bear a high interest rate is credit card debt. In order to eliminate credit card debt, it can be attractive to consolidate such debt with any other loans, so that they can be paid off in one monthly payment at a lower level than the current loans added together.

The lower monthly payments give the impression that you are making savings when you consolidate debt. However, that apparent saving may be due to a longer term of loan. You do need to make sure you are making a saving when you consolidate debt, by checking the total annual interest charges for your existing debts, and compare them with what they would be under a new consolidation loan. (See example below.)

When calculating savings if you consolidate debt, be sure to take into account any charges made by the new lender, and any penalties you may suffer through paying off other loans early.

Improving Your Cash Flow

If you consolidate debt it can bring great relief to your monthly cash flow, if done properly. So, whether it's personal debt or business debt that you are consolidating, you are given an opportunity to put your finances in better order.

Reducing Stress When You Consolidate Debt

Your level of stress can increase steadily if your finances are in poor order, and each month you find it more difficult to meet loan and credit card repayments on time. If you consolidate your debt you should be able to get the monthly repayment to a more affordable level, thus reducing the potential for stress as you struggle to make a lot of monthly repayments. You may also avoid the hassle of creditors chasing you, by preventing yourself from falling behind with payments.

The Affect On Your Credit Report If You Consolidate Debt

The precise affect on your credit report or status when you consolidate debt will depend on your location. Your new consolidation loan will be recorded, but so long as you maintain your payments, on time, for the duration of the loan then you should emerge at the other end with a decent credit standing. However, deciding not to consolidate debt may adversely affect your credit status if you subsequently default on any of your loans or credit cards.

The above are just some of the factors that should be taken into account in a decision to consolidate debt, and it is wise to consider everything fully before deciding. If you decide to go ahead and consolidate, then shop around for the best deal. That will help you for many years to come.


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Consolidating Debt