We all know that simpler does not always equal better, and this could not be more than when it comes to debt consolidation. However, it sometimes makes sense to sacrifice some shorter-term prospects in order to gain in the long term. To explain this statement further, we will examine the top reasons to consolidate debt and show just how some of the disadvantages "now" can translate into financial gain "later."

Simplicity

Perhaps the one of the top reasons to consolidate debt has to do with simplicity. By amalgamating all debt into a single loan or product, you can simplify your regular debt repayment program by reducing payments from x-per month to one single payment. But...

The largest pitfall with simplicity is that it normally comes at a cost. This can mean higher interest rates or it can mean reduced accessibility to credit when your surrender your existing credit in order to obtain the consolidation loan. Why is this such a big deal? With revolving credit, you can use available credit to fund emergencies. By giving it up, you are giving up that peace of mind. As such, simplicity as one of the top reasons to consolidate debt might not seem like such a great benefit after all.

Paid In Full At The End of Term

With most consolidation loans, approvals are given on a term-basis, meaning the amount you consolidate will be fully repaid at the end of the term. Clearly, this is another one of the top reasons to consolidate debt, especially for people who are having a tough time paying down their revolving credit.

Better Future Cash Flow

As part of the simplification process, improving current cash flow was already noted as one of the top reasons to consolidate debt. However, it can also benefit your future cash flow. Assume you planned on saving $200 per month for the next twenty years, but a consolidation loan means you must stop saving for the next five so that you can make a consolidation loan payment of $400 per month. Well, in five years, with all of your debt repaid and an extra $400 in your pocket, you would only have to save, or invest $340 of the available $400 to arrive at the same financial result that you would reach if you kept saving. That leaves an extra $60 for you to improve cash flow or boost your retirement savings.

Of course, these are just three of the top reasons to consolidate debt: simplification of cash flow, guaranteed elimination of debt, and improvement to future cash flow. With each of these top reasons however come some pitfalls, usually in terms of cost and lack of flexibility. Be sure you understand all of the benefits and disadvantages before you consolidate debt and make a commitment to such a lender.