Although debt consolidation may be tempting, as it enables you to get rid of your various debts by unifying them all into one, it can have some effects that may take you way behind on your loans payoffs. Here are some pros and cons of debt consolidation that can help you evaluate your position better.
Pros of Debt Consolidation
1. Reduced Monthly Payments
The biggest advantage of debt consolidation is the considerable decrease in the monthly payments.
2. Reduced Interest Rates
It is possible to get a lower interest rate through home equity loan as it is a secured loan. However, do remember that the word “secured” is not meant for you, it means that it is safe for your lending institution.
3. One Payment, One Creditor
Writing a single check is much easier than writing numerous checks, and you will have just one creditor to deal with.
4. Tax Deductions
It is also possible to get some benefits from the tax deductions with home equity loan. This is because you’ll be paying interest on a mortgage.
Cons of Debt Consolidation
1. Getting Into More Debt
Debt consolidation is not always right for credit problems. As you may again be tempted to continue using the credit cards that you’ve paid off. In reality, this may actually make problems worse by allowing the creditor to make more debts as compared to the amount they initially started with.
2. May Cost More Overall
Although the monthly payments and interest rates may be lower as compared to individual rates, you might get yourself stuck into a longer-term loan in which you will have to pay more interest in the long run.
3. May Take Longer to Pay Off
If you refuse to use the extra monthly savings to pay off your loan, and use it for something else, it can take much longer time to get you out of debts.
4. Could Lose Your Home
In case you opt for a home equity loan, do keep in mind that the lower interest rate that results from listing your home as security, might cost you your home if unfortunately you default on your loan.
5. One Payment
Sometimes, it can be more advantageous for you to pay off smaller loans with higher-interest rates first. This way you’ll get rid of the big loans sooner and feel much lighter, which you can’t do if you’ve combined all your debts into a single loan.
6. May not Qualify for a Loan
Do keep in mind that with so much of debts, you may not qualify for an additional loan. And even if you do qualify, the interest rate might be too high.
7. Disreputable Debt Consolidation Companies
Do some research before you choose any debt consolidation company as there are various companies that claim to offer non-profit debt consolidation services but are just scams in reality.
