The Pros and Cons of Debt Consolidation

Many people find themselves in a position of having more debt than they are able to effectively manage. This can lead to a lot of additional stress, and if left unchecked it will snowball into a more and more serious problem. Not being able to repay the debt can lead to penalties and additional interest charges, which makes it even harder to repay the debt. Something needs to change in order to get control of the situation.

One of the more common ways to break this cycle is through debt consolidation. This usually involves some sort of loan that will let you repay all your smaller outstanding debts, replacing them with a single payment and generally a lower interest rate. There are pros and cons to using this method, however.

For debt consolidation to be effective, one of three things needs to occur:

- Your total monthly payment has to decrease
- The total outstanding debt has to decrease
- The interest rate being paid has to decrease

If none of these conditions are met, there is no net advantage to debt consolidation. After all, whether you make monthly payments of $100, $75 and $25 or a single payment of $200 it really makes no difference if the interest is the same and the amount owed is the same.

The ultimate situation is when you can manage to get all three of these conditions in place, but that is rarely possible.

The most common result of consolidating your debt is that your total monthly payment can be lowered. The hardest thing for most people with debt problems is making all the payments every month. Lowering the total payment is usually the most helpful for those people, easing the stress and letting them get out from under the weight of their debt.

The risk associated with lowering the total monthly payment is that the poor spending habits that may have led to the debt in the first place can rear their ugly head again. It can give people a sense of having money to spare once again, and instead of using that "extra" money to pay down the debt faster, they spend it poorly.

It's critical to discipline yourself against poor financial habits during debt consolidation, to ensure the problem doesn't get worse.