Many financial advisors will say that you should never consolidate your debt, that the industry exists only to keep people in debt. By taking multiple loans and paying them off with a new loan, you can lower your monthly payments and your interest rate. But, in all likelihood, you will be paying your debt off for a longer period of time and you will need to secure the loan to collateral — most likely meaning a lien on your house. You might lower your monthly payments this way, but you won’t get yourself out of debt any sooner. Taking steps to reduce costs in your day-to-day life is a better way to get out of debt, but sometimes it’s just not possible.
The reason there are so many debt consolidation services out there is because it’s so lucrative. People wouldn’t be in this business if you stood to gain anything real from it, other than short-term peace of mind. That said, in the event of a real financial crisis, where you really might not be able to make your minimum payments on your debts, or you’ve been locked into an uptick on a variable-rate loan, or some combination of factors, it may be difficult to find a debt-consolidation loan.
With new peer-to-peer lending services available nowadays, however, this is not necessarily the case. You might very well be able to consolidate debt into a reasonably priced 36- or 60-month loan using Lending Club or Prosper, and you might not have to worry about the debt vultures out there, looking to make a quick buck off of your misery.
But for some, the pain of paying more interest for a longer period of time (unless you refinance at a significantly lower rate) is quelled by their knowledge that they only need to worry about one lender now, and they know exactly what they’ll owe every month. Peace of mind has its price if you’ve dug yourself into a ditch, and so long as you’re actually using debt refinancing to get yourself out of debt — not as a band-aid or stop-gap measure — then you’re in the clear. No financial advice is hard-and-fast, no matter how many times you see someone’s face on CNBC. Take a deep breath, get out the calculator, and figure out which option you’d rather stomach: pain now or pain later, because it’s pain either way once you’re deep in debt.
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