Advantages and Disadvantages of Debt Consolidation

Debt consolidation allows you to pay down the principles of your lending obligations faster, and it offers you means to salvage fair to low credit scores in preparation for a major purchase, such as a new home.

After all, when you're knee deep in debt and your credit rating is less than ideal, home mortgage lenders will charge premium interest on the money they provide for you, after debt consolidation, however, you can apply with your newly salvaged credit and thus get lower term rates. This in turn will save you tens of thousands of dollars (potentially) over the term of your mortgage in reduced interest payments alone.

Debt consolidation also will benefit you psychologically. When you're putting out multiple ?debt fires,? you must juggle a slate of interest rates, terms, and potentially even threats from creditors. When you have just one or two monthly bills to pay, you can budget easier, and you avoid wasting grueling hours calculating out the consequences of different interest rates. Furthermore, debt consolidation costs may be tax deductible, see your accountant about potential implications for moving your money around.

On the con side, however, debt consolidation can pave the way for continued poor spending habits. If you dump your hard won equity into a financial initiative to pay off your bills quickly, you may end up with a longer mortgage term (reduced lifetime savings) as well as a still as yet unbalanced budget.

Sometimes, debt is a good galvanizer -- indebted individuals must learn to budget and think for the long term. Thus, if you paper over poor habits with an easy debt consolidation loan, your financial mistakes might lead to even more dire consequences in the future.

In addition, debt consolidation doesn't always work as planned. If you get involved with a small lender who goes out of business or passes your loan along to a less than scrupulous third party, you could find yourself in legal and financial deep water. In addition, a debt consolidation initiative may not always lend to you at an ideal interest rate.

For instance, if you only have a few credit cards, it may make more sense to move all or most of your debt over to your lowest rate card than to go through the whole song and dance of taking out an independent debt consolidation agreement.