Pros and Cons of Consolidating Your Debt
Deciding whether or not to consolidate debt can be difficult. Here are some pros and cons of consolidating your debt.
There are several pros to debt refinancing that can make it an attractive option. In some cases, particularly if you’re consolidating multiple loans with high interest rates into one loan with a much lower interest rate, debt refinancing can allow you to have more cash available each month. Your payment plan can also be made much more manageable by refinancing and consolidating loans. If you make one payment toward your debts per month instead of several, it becomes easier to keep track of your progress and to remember to make your monthly payments. There are also long-term benefits to consider. Consolidating personal debts can improve your credit score. Consolidating business debts can improve the profitability of that business.
However, there are also several cons to debt refinancing that you must consider before deciding to go through with consolidating your debts. Two common cons are related to paying interest. Consolidating loans can result in you paying more interest over time than you otherwise would. This is because consolidated loans tend to be long-term loans, which is good for your monthly cash flow but can result in more accrued interest due to the longer term, even if the interest rate is low. You may also be required to pay compounded interest. Consolidating debt allows you to pay down your initial loans at lower interest rates and over longer periods of time, but you’ll add the interest rate of your consolidated loans to whatever interest you’ve already accrued for your initial debts. Basically, you’ll be accruing interest on not only your principal but your other interest as well. This can cause your repayment costs to be higher in the long run than they otherwise would be.
There are some cons based on your initial debt situation you should keep in mind, too. If you want to consolidate business debts but haven’t been in business for very long, you may have trouble getting approved for refinancing. If the interest rates of your current loans are already quite low, you may have trouble finding a refinancing plan with better rates and it might be best not to refinance at all.
Remember to do your research before deciding whether or not consolidating your debt is right for you. You may be able to choose between consolidating all or only some of your loans, but in some cases, you may decide that the risks that come with consolidation are too great for you to feel comfortable with.