When we actually look at the pros and cons of getting a debt consolidation loan we see an interesting picture. It is no secret that many people have benefited from these types of loans; however, it 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 whether this type of loan will work for you. Here, we take a look at both the advantages and disadvantages so you can decide for yourself:
Pros
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 a number of different ones. Plus, the once a month due date makes it easier for planning purposes to help raise money to be sent by that due date rather than having to meet several different due dates in a month.
2. Deal only with one creditor.
Much like the point in #1, reducing your bill paying to only one creditor makes it easier for you to deal with them. Many times, doing a debt consolidation loan will help reduce collection phone calls and other collection tactics as you try to get square with the one creditor.
3. Potentially get lower interest rates or a lower monthly payment.
Perhaps the most significant advantage for getting a debt consolidation loan is that you can get a lower monthly payment and sometimes, get lower interest rates as well. This can make it significantly easier in continuously making payments month after month and allow you the opportunity to save extra money each month.
4. Save more money which can be placed towards investments or immediate emergencies.
Many smart people have been able to use the extra savings each month with the lower interest payment and parlayed that into small investments in their home or other businesses to help get more money. This money can then be used to help pay off or pay down the debt creating an opportunity to pay off the loan earlier.
5. Students on the fast track can benefit from consolidation loans.
Young adults who are likely to significantly increase their earnings in a few years can benefit by paying less when they are cash poor and later pay off the loan more easily when they have reached the much larger salary ranges. This can be very helpful to 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 paying off the loan.
In many cases, the lower interest rate or lower monthly payment is made possible by extending the length of the loan on the backend. This can be frustrating to many who find themselves looking at the prospect of being unable to pay off the debt early.
2. Increase odds of paying more interest over the course of the loan.
Much like #1, as the length of the loan is extended the actual amount of interest that could end up being paid can increase significantly. This should be something to consider when you consider how that extra money could be used for others things like college, medical expenses or other needs.
3. Consolidation does not solve bad credit habits.
Many people mistakenly believe consolidating debt provides a panacea to their credit card debt problems. However, all it really does it provide a way in which you can more effectively pay off debt. If people choose to continue to make poor payment decisions with credit cards, they can easily fall back further and deeper into more credit card debt. In cases where this gets out of control, collateral like a home or car can even be take in the even they default on secured debt consolidation loans.
As you can see the debt consolidation pros and cons will vary in their importance and value to each person. For this reason, it is a good idea to go through each of these and attempt to score each one in how important it is to your situation. After doing so, you should have a pretty good idea if this type of loan is right for you.
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