Debt consolidation is often considered as a viable strategy to increase your chances to be debt-free. People tend to believe that it is easy to manage one creditor than many. They think that being liable to one person will give peace of mind and allow a managerial way to deal with debt repayment. However, practically it is not as good as it sounds, at first. In this article, we shall try to understand if this so-called strategy of “Debt -consolidation” is really a tool for becoming debt-f
Let’s first understand what debt consolidation means. It means to create a single debt that will pay all the existing debts. For example, Mr Aniket is having 3 debts, one PL from HDFC Bank for Rs 1.70 Lakh, one credit card from Citi Bank for Rs 1.50 Lakh & one emergency salary loan from ICICI Bank for 0.80 Lakh which amounts to a total of Rs. 4.00 Lakh. All three debts have different rates of interest with credit card charging him exorbitantly high. He decides to get debt free but given the fact that he can’t arrange so much of money to pay suddenly, he decides to go for debt consolidation. Now, Mr Aniket takes a debt consolidation loan from Citi Bank for Rs 4.00 Lakh for a tenor of 4 years @ 12% & pays off all his debts. In this way, Aniket will have to pay a single instalment on Citi Bank Debt Consolidation personal loan which will give him some peace of mind (temporary) as he thinks he will be debt-free in 4 years considering that he continues to pay EMIs on the new loan. This is where the real problem lies. Since the entire purpose here is to become debt-free, the first question that needs to be asked is why were the debts created in the first place. What has gone wrong over the time? What was it that got him in this situation? It is very important to know the answers to these questions as the solution lies there only. If all of us who are struggling to be debt-free do some research on this question, we will soon find that we are in debt because of our bad spending habits. Because we have not given importance to learning money management. Because we are spending without having a budget. Because, whenever we get a bonus or arrear, when we can pay off a big part of our debt with that sudden windfall income, we choose not to. We prefer going out, buying new dresses, spending on our hobbies or expensive items to
- Longer tenor of the loan makes you pay a higher amount as interest.
- It will allow further room for creating more liabilities.
- It is less likely to help as it does not cure bad spending habits.
Notwithstanding all the cons mentioned above, if an opportunity like debt consolidation is used properly with spending discipline, it may still help you become debt-free however, with some more cost. Therefore, you must first improve your spending habits before using debt consolidation as a tool for becoming debt-free.
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