Debt Consolidation Loans: Pros and Cons

If you are thinking about getting a debt consolidation loan, we recommend that you examine the pros and cons before making your final decision.

Though a debt consolidation loan is a great way to get your finances back on track, there may be an alternative that would be better suited to you. The list of pros and cons below should help you identify if a debt consolidation loan is ideal for you.

Advantages of debt consolidation loans

  • Multiple payments get replaced by only one. One simple payment makes budgeting and meeting deadlines much easier.
  • Interest rate reduction. When you were making payments to multiple creditors, you likely had an interest rate with each of them. Now, with only one debt, you will have one interest rate to pay, and the rate is likely to be much lower.
  • Reduced monthly payments. With the interest rate being lower each month, the amount you will be required to pay each month will also be significantly reduced.
  • A single creditor. In a debt consolidation loan you will only need to worry about making payments to one person. This will make financial management much simpler.

Disdvantages of debt consolidation loans

  • You could fall into even deeper debt. Since your monthly payments will be much lower, you will probably find that you have quite a bit of extra savings each month. Be careful not to begin over spending your savings or you could wind up in financial distress again.
  • An extended pay back period. Though an extended payback period may seem like a pro for some, for others it means being in debt for longer. Most people want to have their finances back to normal as quickly as possible.
  • You may end up spending more in the long run. There is always a risk that you could end up paying more money over an extended period of time, than you would if you had paid back each individual debt on its own.
  • You could lose everything. As consolidation loans are secured, if you neglect to make your monthly payments, you could end up losing whatever secured your loan (your house for example).
  • If you have bad credit, in addition to being required to provide outside security, you may also be required to have a co-signor, which in the long run will be worse if you are unable to repay your loan.

Consider your options carefully. If you have bad credit, a Chapter 13 or Chapter 7 bankruptcy may be a better option.