The Pros and Cons of Debt Consolidation Loans
If you have a huge debt like 4 credit cards, a car loan, a consumer loan and a house payment and you always end up ending up making minimum payments which is causing you distress, then you may think of taking a debt consolidation loan.
It is felt that debt consolidation loans are the best option. A debt consolidation loan is where many other loans or lines of credit are paid off.
There are various advertisements where people are shown to have taken consolidation loan and as a affect of which they are relieved. But are debt consolidation loans really such a good idea?
We analyze below the pros and cons of debt consolidation loans:
(1) One-time payment: Reports indicate that an average citizen of America pays 11 different creditors every month. With debt consolidation loans you pay off by making one single payment. This also helps you to configure how much to pay and when. This also makes managing your finances easier.
(2) Reduction in interest rates: The most common type of debt is the home equity loan, which are also termed as second mortgage; the interest rates will be lower than most consumer debt interest rates. Your mortgage is a secured debt. Credit cards being unsecured loans have higher interest rates.
(3). Lower monthly payments: Because debt consolidation loans have lower interest rate and there is only one time payment made the amount paid per month is reduced significantly.
(4) One creditor: Debt consolidation loan have to deal with only one creditor. In case of problems you have to make one call instead of making several calls. This makes controlling your finance easier.
(5) Tax Breaks: Interest paid on credit cards is irrecoverable and not useful at all whereas interest paid on a mortgage can be written off.
But before you get a debt consolidation loan let’s have a look at the cons.
(1) Further debt: With the money left over at the end of the money, you may start using your credit card again or continue with the spending sprees and thus get into further debts.
(2) Longer time to pay off: Mortgages take up to 10 to 30 years to pay off. You will therefore end up spending so many years if you take a debt consolidation loan whereas you may spend only a couple of years to get out of credit card payment.
(3) Spend more over the long haul: Although the interest rate is less, if you take a 30 year loan you will end up spending more than if you keep an individual loan.
(4). Chances of loss: Consolidation loans are secured loans. If you are unable to pay a credit card it would only give you a bad rating but if you are unable to pay debt consolidation loan, since it is a secured loan your collateral against it may be taken up. Mostly it may be your home.
Consolidation loans therefore are not everyone’s cup of tea. Before you decide to take a debt consolidation loan you need to analyze the pros and cons correctly.
