Pros and Cons of Debt Consolidation

For consumers whose debt involves multiple creditors and had become a difficult burden, debt consolidation can spell financial salvation. As with any type of loan, however, debt consolidation has both pros and cons. For example, if you continue to overspend after you consolidate your debt, this type of loan won't help you for long. In fact, you may end up much deeper in debt than you were originally. On the other hand, those who can make a commitment to serious change can reap the many benefits of a debt consolidation loan.

Debt consolidation lowers your monthly payments

One of the most positive features of debt consolidation is that it can lower your monthly payments. People who are maxed out on several different credit cards are typically making high payments on each account, even if they're only making their minimum payments. By consolidating all their debt into one loan, they can enjoy a substantial reduction in their monthly budget.

Lower interest on debt consolidation loans

A debt consolidation loan is a secured loan, which means it’s based on some type of collateral (usually property). Because the bank has something of value they can claim in the event of default, they will usually offer much lower interest rates for debt consolidation loans than those offered by credit card companies. However, one of the negative aspects of these types of loans is that even though the interest rates are lower, the term of the loan generally involves a significantly longer payment schedule.

You will be making payments on most debt consolidation loans for ten to 30 years, a fact that borrowers need to understand before they commit to such a long term obligation. But for those who can’t make their minimum monthly credit card payments and are facing financial ruin as a result, these longer, low interest loans could be worth the longer payment schedule.

Debt consolidation risks

The risk involved with debt consolidation is that if you default on this type of loan you could lose whatever you put up for collateral. If the loan is secured on your home, this is a serious consideration. The real question when considering debt consolidation is whether or not you can reform your overspending habits, stop charging on credit cards, and use the loan to make a fresh start. If you can, debt consolidation may be the right choice for you.