The debt consolidation pros and cons of getting a debt consolidation loan create an interesting picture. It is no secret that many people have benefited from these types of loans; however, it is also true that there are a number of people who did not benefit and hurt their debt position. The challenge is trying to figure out if this type of loan will work for you. Here, we take a look at the pros and cons so you can decide for yourself:
advantage
1. Consolidate all your debts into one monthly payment.
This is advantageous because it helps make it much easier to keep track of one payment rather than several different payments. Plus, the once-a-month due date makes it easy to plan to help raise money to send before that due date instead of having to meet several different due dates in a month.
2. Dealing with a single creditor.
Like the point at n. #1, reducing your bill payment to a single creditor makes it easier for you to deal with them. Often times, taking out a debt consolidation loan will help reduce collection phone calls and other collection tactics while trying to square off with the sole creditor.
3. Potentially get lower interest rates or a lower monthly payment.
Perhaps the most significant advantage of getting a debt consolidation loan is that you can get a lower monthly payment, and sometimes lower interest rates as well. This can make it much easier to make payments continuously month after month and give you the opportunity to save extra money each month.
4. Save more money that can be used for investments or immediate emergencies.
Many smart people have been able to use the extra savings each month with the lower interest payment and turn it into small investments in their home or other businesses to help make more money. This money can be used to help pay off or pay off debt creating an opportunity to pay off the loan sooner.
5. Students on the fast track can benefit from consolidation loans.
Young adults who are likely to add significantly to their income in a few years may benefit by paying less when they are short on cash and then repaying the loan more easily when they have reached the much higher salary ranges. This can be very helpful for those who rack up a lot of debt to help pay for law school or medical school, for example.
Cons
1. Potentially increase the length of loan payoff.
In many cases, the lower interest rate or lower monthly payment is possible by extending the length of the loan on the backend. This can be frustrating for many who are faced with the prospect of not being able to pay off debt early.
2. Increase the chances of paying more interest over the life of the loan.
Like the no. #1, as the life of the loan extends, the actual amount of interest that could end up being paid can increase significantly. This should be something to keep in mind when considering how that extra money could be used for other things like college, medical expenses, or other necessities.
3. Consolidation does not solve bad credit habits.
Many people mistakenly believe that debt consolidation provides a cure-all for their credit card debt problems. However, all it really does is provide a way in which you can pay off debt more effectively. If people choose to continue making poor credit card payment decisions, they can easily fall deeper and deeper into credit card debt. In cases where this gets out of control, collateral such as a house or default on secured debt consolidation loans can be taken.
How can you see the pros and cons of debt consolidation it will vary in its importance and value to each person. For this reason, it’s a good idea to review each of these and try to rate each one based on how important it is to your situation. After doing so, you should have a pretty good idea of whether this type of loan is right for you.