Pros of debt consolidation 

• Every debt with different interest rates from every place will be combined. This helps you reduce all financial burden to just one place. This is easier and less confusing that which one you should pay first.
  
  
• No call from many creditors so less headache.
  
  
• A chance to get a lower interest rate, especially at the beginning of an installment plan. Most of the financial institutes give a lower interest rate than a credit card. However, in the end, to consolidate all debt, the interest rate may be higher than the credit card. If you have both formal and informal debts, there is a high chance to get less interest rate because most of the informal debts are more expensive than the in-system rate. If you have only credit card debt, you should consider and compare the interest rate before deciding.
  
  
• The monthly payment is cheaper which helps reduce your burden and increase your cash flow. For example, Mr. A monthly earning is 30,000 Baht with 4 credit card debts as 20,000 Baht, 30,000 Baht, 40,000 Baht, and 50,000 Baht respectively. Total debt is 140,000 Baht with a minimum 10% monthly payment which is 14,000 Baht which makes Mr. A incapable to pay. Moreover, paying a minimum rate is also makes him incapable of end any of the 4 credit cards. If Mr. A consolidates all debts by requesting a 140,000-Baht personal loan will result in paying only 6,806 Baht per month (calculating from the capital amount of 140,000 Baht with 25% interest rate per year and 3-years installment plan). This helps him reduce the monthly payment and also increase cash flow for further financial planning.
  
  
• Moreover, debt consolidation allows you to know how long you need to pay such as 3-years, or 5-years (as agreed with the financial institute) and also you can plan the future financial which allows you to end the debt. As mentioned above that if you are only capable of paying a minimum 10% credit card, you are unable to pay the whole debt because it is calculated an interest rate, collection fees, and other penalty fees from the credit card owner. Eventually, you feel like no matter how much you paid; the credit debt balance has not been even reduced.

Cons of debt consolidation 

• Most of the interest rate for personal loans is higher than the credit cards. From the previous average at 20% per year, it may increase to an average of 25% per year. (You should compare the interest rates before deciding.)
  
  
• When you consolidate all debts from a credit card. Your debt balance will include principal, interest, and fees. So, this lump sum will be the new debt you have to pay which means that you have to pay a double interest.
   

In summary, debt consolidation has advantages and disadvantages. If you are experiencing debt problems and it seems increasing and effect to your cash flow. Therefore, debt consolidation may be your option. However, you need to compare the pros and cons then select the best solution for yourself. Anyway, the best way to deal with debt is saving, and do not be extravagant. Moreover, be patient, pay all debts and you have to understand that everything takes time. Do not give up and eventually, all debt will end and you can start a new and better financial you.

Nipapun Poonsateansup CFP®

Independent Finance Planner and Public Speaker