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Pros and Cons of Debt Consolidation

November 15, 2018

If you have mortgages on multiple commercial properties, you might do better by consolidating them into one loan. People sometimes use the terms debt consolidation and refinancing interchangeably, but they are not the same thing. Refinancing replaces a single loan with a new loan at lower interest rate loan. Debt consolidation converts multiple loans into a single loan.

The point of debt consolidation is to make payments more manageable. It might not be possible to get a lower interest rate. That makes it essential to fully understand the consolidation transaction, consider all the pros and cons, and be sure that improved terms are worth the cost of the new loan and any change in interest rates.

The Pros

> Lower payments. If you find yourself juggling multiple loan payments, maybe you had to take out several short-term loans to make it through a cash-flow crunch. Or maybe they are older loans with higher interest rates.

> Balancing your portfolio. If you own a mix of commercial properties, loan consolidation could allow you offset the risk of some properties with the strength of other mortgages in your portfolio, as well as obtaining better terms and fees on the new loan.

> Organize your finances. Multiple payment schedules may create so much confusion that you actually miss payments. Having only one creditor and one monthly payment makes it easier to pay on time.

More time to pay. Consolidating short-term loans into one loan can extend your repayment period, giving you more time to grow your business and your profits.

The Cons

> Paying more interest over time. Consolidating business debt into a longer-term loan is a two-edged sword: Even though the interest rate is lower, you might pay more in interest over the life of the loan.

> Not addressing underlying issues. If a debt consolidation loan helps with your cash flow, that might only be a short-term fix to a long-term problem. If you haven’t fixed your cash flow problems, lower monthly payments will not help in the long run.