Are you a business owner considering debt consolidation?
If so, there are many factors and potential outcomes that you should be taking into account before making any decisions.
Thinking deeply and weighing up your options before committing to anything financially is a great general rule to avoid unreversible errors and poor credit scores.
This same thought process should apply when considering consolidating your debts. What better way to properly weigh up potential outcomes of debt consolidation than to engage in a pros and cons list?
In this article our credit collection agents will discuss the pros and cons of debt consolidation to help business owners to make an educated and well-thought-out decision when it comes to engaging in such financial processes.
What is Debt Consolidation?
Balancing various debts at the same time can be difficult, especially if you are attempting to improve your financial situation or credit score/report.
Debt consolidation is a process in which you can combine some or all of your current debts into one to simplify all of your repayment commitments.
This will generally occur through taking out a new loan from a bank and using the money from the loan to pay off whichever other debts are in their entirety.
You can then pay this loan off with likely new conditions and interest rates, hopefully, terms that suit your situation better.
This process can involve several potential consequences depending on the debtor.
It may also, however, be greatly beneficial to the debtor, generally depending entirely on the amount of thought they put into the process and the current financial stability of the individual.
The Pros of Debt Consolidation
There are some good things about debt consolidation, including:
- It can Simplify the Payment Process
- It may Lower Interest
- It an Improve Credit Score
We will explain in more detail below.
Can Simplify the Payment Process
One way that consolidating your debts can help you is by making the debt repayment process much easier to manage.
Combining all or some of your current debts into one payment by consolidating can help to take the weight off of your shoulders of having to manage various payments each month.
This process can also help you to get a better idea of your financial status at the moment and how you should behave in the future to improve it.
Information such as a clear period until you will be free from debt, especially if you chose to consolidate all debts, may also arise from debt consolidation.
Debt Consolidation May Lower Interest
Another way that debt consolidation can greatly assist your finances and overall state is by lowering the overall interest you are paying on debts.
As discussed in previous articles, creditors are much more likely to offer top deals to clients that appear trustworthy with previous payments, taking into account your personal details such as your credit score and report.
If your credit score has increased due to financial habits since initially borrowing from your current creditors, debt consolidation may create an opportunity for you to find a better interest rate.
A lower interest rate can save you large amounts of money from debts, money that can instead be invested in getting yourself completely out of debt!
Debt Consolidation Can Improve Credit Score
Another way in which debt consolidation can be beneficial to you is by potentially improving your credit score.
Generally, when you are first accepted for a new loan, you will experience a small drop in your credit score due to the hard credit inquiry, a process where a creditor will request and obtain your personal information.
After this term, however, you may experience a raise in your credit score for various reasons depending on the type of debt you are paying off with the consolidation.
An example of this is when you pay off a debt with a credit card, or another form of revolving credit, which can decrease your credit utilization, overall increasing your credit score.
The Cons of Debt Consolidation
There are some other things about debt consolidation, including:
- It can Increase Costs
- It may Raise Interest
- It may Pay More Interest in Overtime
- You May Miss Payments
- It may Encourage Poor Spending Habits
We will explain in more detail below.
Debt Consolidation Can Increase Costs
One way in which debt consolidation can be damaging to yourself and your business is by increasing debt-related costs.
Taking out a new loan, as you are likely well aware, can include some extra costs on top of simply repaying the debt.
These costs may include origination fees, closing fees, balance transfer fees, and other payments before you can even begin to consider paying the debts.
May Raise Interest
As mentioned prior in the article, whether or not debt consolidation will work for you depends heavily on the financial state your business is in at the moment.
Although debt consolidation may lower interest rates for debt payments, it may also cause them to be raised.
Whether or not you qualify for lower interest rates will depend on your current credit score.
If you can indeed secure a loan with a lower interest rate, go right ahead (with consideration of course).
If not, you may want to consider different ways in which you can get yourself out of debt or do whatever you wished to achieve from the debt consolidation.
May Pay More Interest in over time
Loans can take a while to pay off.
Another way in which debt consolidation can be detrimental to your finances is by resulting in more interest rate payments over time.
Although your interest rate may be decreased in the debt consolidation, paying a brand-new loan from beginning to end can mean you incur more fees in interest rates over the years than you would otherwise.
You can avoid this issue, however, by simply budgeting so that you pay more than the minimum payment each month, decreasing the time it takes to pay off debt.
You May Miss Payments
Missing payments can be extremely damaging to your finances.
By engaging in debt consolidation, you risk potentially missing payments from your debt, a risk that can wreak havoc on your credit score, report, and general finances.
May Encourage Poor Spending Habits
We can all struggle with self-control.
Another threat that is posed by consolidating your debt is potentially encouraging poor money management and spending habits by the business.
Debt consolidation can give a level of security to the debtor, that you can cover all of your loans with this process in a relatively simple manner.
This can cause overconfidence in finances and lead to poor spending habits and a simple lack of self-control when it comes to money management.
You can avoid this, again, by establishing a clear budget for business expenses and sticking to it at all times, no matter how financially stable you may feel.
Consider Debt Collection
If consolidating your debt simply seems like a concept that would not work for your business after considering the pros and cons, you may wish to engage a debt collector instead.
Although it may seem like opposite ends of a spectrum, hiring a debt collector can help to improve the cash flow and financial stability of your business, overall allowing debts to be paid off in a much more time-efficient manner.
This can rid the need for debt consolidation altogether, saving you the trouble of weighing up your options so intensely!
Advance debt collection is an Australia-wide commercial debt collection agency and credit and accounts receivable management. We can recovery your debts, conduct skip tracing, and manage your accounts receivable. We collect your debts for commission only. This means no collection, no commission. We are professional debt collectors with combined 20 years of experience to help you collect your debts. We are partnered with expert litigation lawyers with years of experience in debt recovery, enforcement, and insolvency. Under the Agents Financial Administration Act 2014 Advance Debt Collection Pty Ltd hold authority number 4583821 to act as a debt collector. ADC Advance Debt Collection® is a registered trademark.