Bill consolidation can be a tempting alternative because it offers borrowers the ability to combine their loans into a lump sum payment. However, financial experts warn that bill consolidation could be risky, and could play a key role in increasing debt instead of mitigating it. Many people who take up bill consolidation without considering other viable alternatives will find themselves in similarly challenging financial situations.
What is bill consolidation?
Bill consolidation is the loan refinancing process which combines a number of credit accounts into a singular loan. Borrowers will only be required to make one monthly payment on their debt, which can be convenient and easily manageable. Some bill consolidation options allow you to reshape the terms of your repayment schedule, which can help reduce your monthly expenses and improve your ability to pay.
There are two key benefits to bill consolidation. The monthly payment is convenient and renegotiated to meet your income levels and ability to pay. The ability to get lower monthly payments and a reduced interest rate could help make your loan very affordable.
Is bill consolidation an ideal option?
There are many different types of bill consolidation, ranging from student loan refinancing to home equity loans, credit transfers and other types of secured debt consolidation on offer for different types of borrowers. Bill consolidation can be dangerous because it does not eliminate any debt. Instead, it adds up your loans into a singular debt.
Bill consolidation will not provide a way to improve your credit in future, or help you build healthy financial security. It merely papers over the cracks, and combines all debt into a singular item. You could end up paying more for longer by consolidating your debt. This could be a long term effect of bill consolidation even with significant changes in the interest rates. If your home equity is tied to your bill consolidation, missing out on repayments could cost you your property. If not carefully calculated, bill consolidation could damage your credit score and leave you with an even more unaffordable loan debt.