When it comes to simplifying your finances, it often makes sense to sacrifice financial benefits in the short-term in order to reach longer term financial goals. With that in mind, we will discuss the top reasons to consolidate debt here and try to illustrate how some of the pitfalls can yield better long-term opportunities.
Simplification
Among the top reasons to consolidate debt is simplicity. By simplifying your payments, you are juggling less payments throughout the month and are therefore better able to tackle the rest of your monthly finances with much less stress. But...
The largest pitfall with simplicity is that it normally comes at a cost. This can mean higher interest rates or it can mean reduced accessibility to credit when your surrender your existing credit in order to obtain the consolidation loan. Why is this such a big deal? With revolving credit, you can use available credit to fund emergencies. By giving it up, you are giving up that peace of mind. As such, simplicity as one of the top reasons to consolidate debt might not seem like such a great benefit after all.
Debt Paid in Full at End of Term
With most consolidation loans, approvals are given on a term-basis, meaning the amount you consolidate will be fully repaid at the end of the term. Clearly, this is another one of the top reasons to consolidate debt, especially for people who are having a tough time paying down their revolving credit.
Improved Future Cash Flow
As noted earlier, improving cash flow immediately is also one of the top reasons to consolidate debt (simplicity). However, borrowers often overlook the improved future cash flow, which means that while you are in the process of repaying the consolidation loan, once it is repaid, you can often spend only a fraction of the loan payment to "catch up" on missed opportunities. For example, if you simplify your cash flow by taking out a consolidation loan that will cost $400 every month, but must sacrifice your retirement savings of $200 per month for 5 years, you may be better off. In five years, even if you save just $340 of the available $400 for the next fifteen years, you would end up being in the exact same position financially as you would be if you continued saving $200 for twenty years starting today.
Naturally the three reasons above are just some of the top reasons to consolidate debt. Again, they are simplification of current cash flow, a guaranteed repayment of debt at the end of the loan term and a likely improvement to future cash flow and savings. There are some sacrifices to consolidating debt, though. Normally, this includes higher interest rates and a sacrifice of flexibility in terms of credit availability. Borrowers should always make sure they understand the terms of their consolidation loans and be 100% certain that it is the right financial move before signing on the dotted line.
Simplification
Among the top reasons to consolidate debt is simplicity. By simplifying your payments, you are juggling less payments throughout the month and are therefore better able to tackle the rest of your monthly finances with much less stress. But...
The largest pitfall with simplicity is that it normally comes at a cost. This can mean higher interest rates or it can mean reduced accessibility to credit when your surrender your existing credit in order to obtain the consolidation loan. Why is this such a big deal? With revolving credit, you can use available credit to fund emergencies. By giving it up, you are giving up that peace of mind. As such, simplicity as one of the top reasons to consolidate debt might not seem like such a great benefit after all.
Debt Paid in Full at End of Term
With most consolidation loans, approvals are given on a term-basis, meaning the amount you consolidate will be fully repaid at the end of the term. Clearly, this is another one of the top reasons to consolidate debt, especially for people who are having a tough time paying down their revolving credit.
Improved Future Cash Flow
As noted earlier, improving cash flow immediately is also one of the top reasons to consolidate debt (simplicity). However, borrowers often overlook the improved future cash flow, which means that while you are in the process of repaying the consolidation loan, once it is repaid, you can often spend only a fraction of the loan payment to "catch up" on missed opportunities. For example, if you simplify your cash flow by taking out a consolidation loan that will cost $400 every month, but must sacrifice your retirement savings of $200 per month for 5 years, you may be better off. In five years, even if you save just $340 of the available $400 for the next fifteen years, you would end up being in the exact same position financially as you would be if you continued saving $200 for twenty years starting today.
Naturally the three reasons above are just some of the top reasons to consolidate debt. Again, they are simplification of current cash flow, a guaranteed repayment of debt at the end of the loan term and a likely improvement to future cash flow and savings. There are some sacrifices to consolidating debt, though. Normally, this includes higher interest rates and a sacrifice of flexibility in terms of credit availability. Borrowers should always make sure they understand the terms of their consolidation loans and be 100% certain that it is the right financial move before signing on the dotted line.
About the Author:
With more than 16 years of financial services experience, Chris Blanchet is the author of the e-book, Help Fix My Finances. He maintains a debt-free blog at How To Repay Debt.com and is a regular contributor to Debt Consolidation Opinions.
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