Pros and Cons to Debt Consolidation Loans

Pros and Cons to Debt Consolidation Loans

February 28th, 2013

Cut the Credit

Debt consolidation is the act of refinancing your home, or taking out a 2nd mortgage, to pay off several smaller loans including retail or consumer loans that may not be tied to your home. It’s a way to help people gain control of their finances; instead of having all types of loans with various interest rates, debt consolidation combines all of these loans into one, resulting in one payment each month. Although debt consolidation may sound to be the best solution to your financial situation, there are many pros and cons to consider.

Pros to Debt Consolidation

The greatest advantage to choosing debt consolidation is that it allows you to regain control of your finances. Instead of having to remember to pay multiple loans each month, everything is combined into one loan. So, if you ran up your credit cards during college and now have substantial school loans, it can be extremely helpful to have everything in one place. You avoid late payments, late charges and other miscellaneous penalties that can add up when you forget to make a payment. Remember that late or missed payments also drive down your credit score.

Additionally, debt consolidation allows you to pay down the principle faster. This can help you strengthen your credit score and see the light at the end of the tunnel sooner. And, having one payment that you can count on each month makes it easier to budget. Even if the payment is several hundred dollars, you know exactly where you stand each month. Having a budget you can stick to will manage your credit score, making it easier to take out a home or car loan with lower down payments.

Finally, debt consolidation can make the terms of your debt a bit more attractive. Instead of having to pay off a balance in six months for example, the new arrangements may give you 12 to 18 months. You may also be able to get a better interest rate on some of your credit cards. If you had late payments on one card, your interest rate may be 30 percent, and this makes it difficult to catch up. When consolidating your debt, you can get a lower interest rate and more time to pay off debts.

Cons to Debt Consolidation

Of course, for everything that looks good, there must be a price to pay. Such is the case with debt consolidation, as there are potential negatives to be aware of as well. For starters, it can be difficult to find an acceptable interest rates if your debt consolidation takes the form of a 2nd or 3rd mortgage. Since consolidation programs are designed for people who have a lot of debt, it’s easy to raise the interest rates. So, if the interest rates are the same or more than what you’re paying now, it makes little sense to consolidate other than the convenience factor.

However, if you are using your home for debt consolidation and doing a first mortgage refinance, changes are good you can get a great rate on a conventional loan.  Call today for a quote.

Also, it’s likely that you will be paying off your debts for a longer period of time. Since consolidation doesn’t erase debt, you’ll just be paying off the debts over a longer term, with more money going to interest. This is a significant point to consider since many people get swept in with the attractive initial offers, but don’t realize that they’ll end up paying more in the long run. When reviewing debt consolidation, keep both the short- and long-term scenarios in mind.

A final point to consider is that debt consolidation doesn’t teach the consumer good habits. If you’ve struggled to maintain your finances, consolidating debt won’t do you any good if you continue to rack up more credit on other credit cards. This is easy to do since people have the false impression that they have less credit since everything is on one card, perhaps with a lower balance and interest rate. So, if you know you have a weakness with this, understand that consolidating your debt doesn’t make it go away.

Should You Consolidate Your Debt?

Speaking with a financial professional will help you determine whether or not debt consolidation is right for you. Each situation is unique, which means each situation will have a different answer. Generally speaking, if you’re looking for a way to combine past debts for convenience and the ability to keep your credit score in good order, debt consolidation can be extremely beneficial. It won’t damage your credit score, and you can take the hassle out of having to make multiple payments to different lenders. However, if you feel that your financial situation is more complicated, a debt settlement may be a more effective solution.

For more information regarding debt consolidation, contact Stephanie Weeks.