The Pros and Cons of Debt Consolidation Loans
A debt consolidation loan is the process of rolling numerous unsecured, short-term loans into a secured, larger and long-term loan. Many times these unsecured loans being consolidated are high interest personal loans, school loans, car loans, store accounts and credit cards.
The Pros
1. When dealing with serious financial issues, stress takes over and your peace of mind is usually non-existent. A debt consolidation loan can ease your stress and restore your peace by providing a manageable payment plan to begin to eliminate your debt.
2. These loans provide you the manageable monthly payment by lengthening the repayment period, thus substantially lowering your monthly payment. This will assist in eliminating the stream of late fees and other added charges that could lead into even more fees for going over your credit limit.
3. Managing one loan is much easier than managing multiple ones. Instead of juggling numerous creditors that are asking for a different payment each month, you can make one set monthly payment. This makes your monthly budgeting much simpler.
4. A debt consolidation loan can assist you by providing you time to start repairing your credit rating.
5. If a borrower should find that he is in financial trouble again, there will only be one lender to settle with. The typical gush of continuously harassing phone calls from various creditors is avoided.
The Cons
1. Individuals that have the worst financial problems and extremely poor credit scores may not qualify for the loan. Either that or they may be given high interest rates. When an individual is denied for a debt consolidation loan, seeking a certified credit counselor and considering a debt management program would be recommended.
2. The amount of interest paid on the longer-term loan will be higher than the interest that would have been paid on the shorter ones.
3. The consolidation of debt is not a problem solver, but a ‘tool.’ The borrower needs to combine his debt consolidation ‘tool’ with improved management of his money and better budgeting techniques.
4. Personal loans and credit card debt are generally unsecured, whereas a debt consolidation loan is usually secured. This means that the borrower is putting their house up as collateral when a consolidation loan is obtained. If the borrower fails to make his payments, his home is at risk.
5. Because a consolidation loan is a long-term commitment, the borrowers need to decide whether they are interested in obtaining a loan that may take many years to pay off.
6. Some say that a consolidation loan can harm your credit rating in the short term; it all depends on how the loan is scored.
Is a Debt Consolidation Loan the Answer for You?
Debt consolidation loans are not always the answer. Sometimes it is difficult to find a fair interest rate. If the rate on the consolidation loan is not any better than the rates on the current loans, what is the sense of consolidating?
It is important to remember that in life there are pros and cons for everything. Taking out a loan to extend your credit and increase your overall indebtedness, is not wise. Nevertheless, for individuals who are willing to tighten their belt and budget prudently, a loan can be a great way to address and eliminate their issues with debt.
Therefore, the answer is that whether you should consolidate your debt into a single loan will depend on your intentions for the loan, as well as your financial situation. It is a good idea to contact a financial professional who can help you decide what the best choice is for you.
