Debt consolidation has long been a hot but controversial topic. Where some people are more than happy to centralize their loans, be it home or education loans, many worry about the disadvantages.
Debt consolidation can be an exciting idea for people who pay loans every month and have inadequate funds in their accounts. Consolidating several small loans into one loan somehow takes off the pressure of repaying numerous loans.
Through bank consolidation, a borrower can pull two or more loans into one single loan. Then pay for that single loan at one interest rate and duration, one day each month, as set by the bank.
As already stated, for many people debt consolidation is a great idea but for some people, it is not a good option.
Robert Foo, a financial planner, says debt consolidation is popular because banks want to attract the attention of new potential customers. Banks adopt these methods due to the increase in competition and lack of credit-reliable people. The measures help banks to grow and maintain their customer base.
Foo says the banks try hard to attract new customers who are indebted under several loans from other banks. The banks offer borrowers a chance to simplify their finances by consolidating the loans into a single payment.
Some people make a mistake by trusting the banks. Some see it as an opportunity to save money every month, but reality is often different from their expectations.
The scheme looks attractive, but it is often just a way of delaying things. At the end of the day, they still have to re-pay everything they borrowed.
Foo highlights several issues with spending habits. Foo says most people lack budgeting and fractioning skills. People are emotional shoppers and not logical shoppers, he says. Evaluating finances and reaching the root cause of the problem is Foo’s way of dealing with the issue.
He tells people to answer the questions like, “Why are they struggling? Is it because of a decline in their monthly income?” “Are they making poor financial decisions?” or “Are their consumption habits to be blamed?” He says the solution to the problem lies in the answers to these questions.
Foo says every person must have a financial plan. A good plan can help to pay debts without any need for debt consolidation. If a person manages their finances well, they could easily pay off many loans.
He also says this is not the solution for every problem as every financial situation is different. For instance, student loan consolidation might be a better idea than household debt consolidation.
The latest loan statistics for 2018 show there are more than 44 million borrowers and collectively they owe around $1.5 trillion in student loans alone.
The SoFi survey, conducted recently, showed some interesting results. According to the survey, about 83% of participants did not feel at ease due to the burden of student loans. About 34% of people lost sleep and around 15% went to mental health professionals to ask for help. And 20% wanted to take dramatic measures to get rid of student loans.
For the latter group, student loan consolidation is probably a great idea for them.
Students adopt two strategies to centralize their loans. Either they directly consolidate their loans via the federal government or they consolidate via a private lender.
The biggest advantage with consolidating student loans is that the person just repays one single loan. There is just one payment, on one date, to one lender. There is no worrying about remembering many dates and many lenders.
The idea of loan consolidation for paying household debts may not always be the best choice. Many debts can be paid more efficiently with proper planning and management of household expenses.