The Pro's and Con's Of Debt Consolidation
You are swimming in debt. You have 4 credit cards maxed out, a car loan, a
consumer loan, and a house payment. Simply making the minimum payments is
causing your distress and certainly not getting you out of debt. What should
Some people feel that debt consolidation loans are the best option. A debt
consolidation loans is one loan which pays off many other loans or lines of
Iím sure youíve seen the advertisements of smiling people who have chosen to
take a consolidation loan. They seem to have had the weight of the world
lifted off their shoulders. But are debt consolidation loans a good deal?
Letís explore the pros and cons of this type of debt solution.
1. One payment versus many payments: The average citizen of the USA pays 11
different creditors every month. Making one single payment is much easier
than figuring out who should get paid how much and when. This makes managing
your finances much easier.
2. Reduced interest rates: Since the most common type of debt consolidation
loan is the home equity loan, also called a second mortgage, the interest
rates will be lower than most consumer debt interest rates. Your mortgage is
a secured debt. This means that they have something they can take from you
if you do not make your payment. Credit cards are unsecured loans. They have
nothing except your word and your history. Since this is the case, unsecured
loans typically have higher interest rates.
3. Lower monthly payments: Since the interest rate is lower and because you
have one payment vs many, the amount you have to pay per month is typically
4. Only one creditor: With a consolidated loan, you only have one creditor
to deal with. If there are any problems or issues, you will only have to
make one call instead of several. Once again, this simply makes controlling
your finances much easier.
5. Tax Breaks: Interest paid to a credit card is money down the drain.
Interest paid to a mortgage can be used as a tax write-off.
Sounds great, doesnít it? Before you run out and get a loan, letís look at
the other side of the picture Ė the cons.
1. Easy to get into further debt: With an easier load to bear and more money
left over at the end of the month, it might be easy to start using your
credit cards again or continuing spending habits that got you into such
credit card debt in the first place.
2. Longer time to pay off: Most mortgages are the 10 to 30 year variety.
This means that rather than spend a couple of years getting out of credit
card debt, you will be spending the length of your mortgage getting out of
3. Spend more over the long haul: Even though the interest rate is less, if
you take the loan out over a 30 year period, you may end up spending more
than you would have if you had kept each individual loan.
4. You can lose everything: Consolidation loans are secured loans. If you
didnít pay an unsecured credit card loan, it would give you a bad rating but
your home would still be secure. If you do not pay a secured loan, they will
take away whatever secured the loan. In most cases, this is your home.
As you can see, consolidated loans are not for everyone. Before you make a
decision, you must realistically look at the pros and cons to determine if
this is the right decision for you.
About the author:
Wesley Atkins is the owner of
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