More and more people today are seeking respite from their financial problems by consolidating their loans. Debt consolidation is a theoretically simple process of combining all the loans of a person into a single loan, with a single rate of interest and repayment pattern. When a person consolidates his/her loans, the payment is to be made only to the consolidator, and he/she ceases to be accountable to the previous creditors. Debt consolidation is also known as debt refinancing, or in common terms, debt settlement.

Though debt consolidation seems to be a very easy process to begin with, there are some ups and downs of the process that need to be considered carefully. Let us discuss the advantages and disadvantages that are association with debt consolidations.

Advantages of Debt Consolidation

(1) The first reason why one should consolidate the debts is that it simplifies the money management process. After consolidating the debts, the person makes only one payment. Also there is only one bill that comes in through the mail, which reduces the tension. All kinds of loans such as credit card loans, medical loans, car loans, student loans, home loans could be consolidated into one.

(2) Not only will there be just one bill to be paid, the amount in it will also become significantly lower. This would allow more cash to remain in the house.

(3) Consolidation is done when the prevailing interest rates in the market are low. So, the person with a consolidated loan will continue paying on a lower rate of interest than compared to credit cards.

(4) There will be no more calls from creditors asking when to come and collect the payment. This becomes a big lightening of the mental tensions.

Disadvantages of Debt Consolidation

(1) Debt consolidation does not erase your debt. The whole debt is still to be paid. Consolidation only lowers the rates of interest.

(2) Consolidated loans are usually designed for longer periods of time. So you could end up paying more interest in the long run, even if your monthly payments are lower.

(3) There are several finance charges which will have to be paid when consolidating. This will increase the initial bills.

(4) Debt consolidation may put a person in a lackadaisical state of mind. The person may become too much at ease since the payments have become low. This could make the person go ahead and take some more loans and compound the problems.

Lending institutions that provide consolidation of loans will require making a careful investigation into the credit rating of the person before making the consolidation. They would make sure that the person will be able to pay off the loans even after consolidation. Having some equity could better the chances of getting loans consolidated.

If someone feels the cons of debt consolidation are too intimidating, then there are other options by which problems of indebtedness can be solved. Credit counseling services could help in this regard. They could even describe how debt consolidation only cures the symptoms, but not the disease itself.

In this fast paced world of consumerism, money is a commodity that is all powerful and yet, ephemeral. The nagging worry of “How did I spend so much in so short a while” is something that haunts even the most affluent, and more so for the forever wanting middle class. It is in this context that the planning of one’s personal finance gains immense import.
The Need

Modern science has increased the life expectancy of humans by decades. At the same time, it has also ushered in a plethora of temptations garbed as necessities – needless to say, these temptations do not come cheap. The ever-increasing avenues of spending give today’s man a wholly different perspective on wealth as compared to even those of just a century ago. While earlier wealth referred to tangible objects such as land and jewellery, today a wide range of tangibles and intangibles have crept into the picture – while owning a Monet is wealth, so is owning a yacht. And the means to achieve either are the greenbacks. However, while money remains a constant to define wealth, destiny is forever fluctuating – what appears as an immense pool of money today may just dry up tomorrow. In such a situation, one needs to plan years ahead to hedge the uncertainty of the future.

The most common situations, which call for financial planning for the average middle class person, are:

Retirement:

For any salaried individual, retirement is an eventuality. While many countries provide social security to retired people, the real income that one earns from such schemes may be severely hit by inflationary trends.  That, at an age when he/she may not mentally or physically be in a position to engage in constructive, income generating employment. Obviously, such depreciation of real income/capital calls for long-term planning.

Children’s Education:

With the steep rise in unemployment the world over, people need to acquire special skills to be assured of even a moderate living. And as the demand for such skills is increasing, so is the cost of acquiring such skills getting pushed up. A person whose child is say ten years old today would require a substantial amount of money a decade hence for his college education, and planning for the same needs to done from today to avoid complications at the last moment.

Medical Contingencies:

Medical contingencies have become so much a part and parcel of everyone’s lives that they can no longer be termed as contingencies. Again, while newer and better medical tools are being developed everyday, the cost of medical treatment is unfortunately on an upward spiral. Thus, while a person can expect to live longer thanks to the modern day medicine, it is not a very comforting thought when one takes a look at what effect it could have on one’s finances. Even planning ahead may at times not suffice, but it can at least provide a cushion to fall back on when ailments hit.

Apart from the above, sudden cash flow mismatches may occur for numerous reasons – an impulsive tour to Hawaii, for instance. While every such eventuality cannot be anticipated in advance, the least a sensible person can do is to create a buffer for himself for the rainy days. And that buffer can only be created through proper planning of one’s finances while the going is good.