The Pros And Cons Of A Debt Consolidation Loan

The Pros And Cons Of A Debt Consolidation Loan

Before deciding whether a debt consolidation loan is the answer to your debt problems, make sure you know exactly what you are getting yourself into. Here are the pros and the cons of consolidating.

Our reality today has made it more difficult to avoid debts. With the advent of credit cards and the busy lifestyle, we find it very difficult to take the time and exert effort to manage our finances. If this trend continues and your income does not fare well relative to your expenses, you will then join the majority who are financially bothered by debts.

What happens then if you have too many debts that you can barely manage? Well, a debt consolidation loan may solve this problem. Consolidating your debt means that you will take on a larger debt in order to pay off all your existing ones. The larger debt will replace all your high interest loans such as personal or credit card debts, and you end up paying only for one single bill every month.

With consolidation, you do not only lower your total monthly payments, but you need to pay only for a bill or two. You can have the chance to pay off your loans much quickly if you manage your monthly savings well. With debt consolidation, you can say goodbye (though temporarily) to the risk of bankruptcy, the creditor calls, and the overdue penalties. On the other hand, a debt consolidation loan usually has substantial tax benefits. You may be able to deduct the interest you pay from your income tax, thus lowering your tax burden.

At first glance, getting a debt consolidation loan may seem like the perfect solution. Your monthly payments get lowered, and you get some extra cash as savings every month. However, note that consolidating is not best for everyone. Depending on how you the loan are structured, you may sometimes end up with a higher rate and longer payment term. Since a debt consolidation loan usually involves collateral, it presents as a greater credit risk than other smaller debts that you have.

Also, consolidating too often creates a false sense of security – you feel like your debts are all gone, when in truth, you still have one that you might need to pay for a longer period. Some people even end up getting lured into the cycle of spending, borrowing, then consolidating, until they have accumulate more and more debts than they can hardly manage. This is not to say that getting a debt consolidation loan is a bad move. This is only to point out that even if it appears hassle-free and perfect, consolidating can lead to unfortunate results if not managed properly.

A debt consolidation loan is an attractive concept if you want to manage your finances well. If you have the discipline to get through the debts without having to incur more, then consolidating may be perfect for you. However, if you think that with a little more effort you can pay off your loan without any form of consolidation, and then by all means, do as much as you possibly can. Consolidating can be a real solution to your debt problem, but should not be considered as the only solution. Instead, you should take it as one of your last resorts.

The problem of the single lender rule Previous post The problem of the single lender rule
The Pros and Cons of Payday Loans Next post The Pros and Cons of Payday Loans