Debt Consolidation Loans
The Pros and Cons
Ads for debt consolidation loans are everywhere - on TV, the radio, in
magazines, and even in your mail. It seems like the answer to all your
problems, but before you proceed, you should consider the points below: 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 you do?
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 credit.
I’m sure you’ve 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? Let’s explore the pros and cons of this type of debt solution.
Pros
- 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.
- 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.
- 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 decreased significantly.
- 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.
- 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, doesn’t it? Before you run out and get a debt consolidation loan, let’s look at the other side of the picture – the cons.
Cons
- 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.
- 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 debt.
- 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.
- You can lose everything: Consolidation loans are secured loans. If you didn’t 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.
Wesley Atkins is the owner of www.credit-cards-advisor.com - which aims to get you fitted with the best credit cards to suit your situation. With numerous credit card articles and easy online credit card applications you will never choose the wrong credit card again.
Consumer Credit Counseling
Debt Reduction Assistance
Credit Card Consolidation
More Debt Solutions
