Pros and Cons of Debt Consolidation Loans

Pros and Cons of Debt Consolidation Loans  | read this item

If you have a substantial amount debt through loans and credit card dues, a debt consolidation loan is the last option you have before bankruptcy. Bankruptcy remains on your credit score for many years, and makes it very difficult to obtain a fresh loan during that time. So it is indeed smart to avoid it.

Debt consolidation loans are new loans taken out to pay off your existing debts. It is usually a secured loan, whereas personal loans and credit card dues are usually unsecured. It is therefore most advisable to pay off your high rate loans with a low rate debt consolidation loan.

Debt consolidation loans have many advantages:
-It is easier to manage one loan since you are only repaying it to a single lender.

-Interest rates on these loans are lower than the unsecured rates of credit card dues and personal loans.

-The amount of the monthly payment is smaller because of the lower interest rates.

-The interest you pay on a debt consolidation loan yields tax benefits as well.

There are also a few disadvantages to debt consolidation loans:

-The period of the loan is longer than the period of unsecured loans so you end up paying a larger sum of interest in total.

-Usually debt consolidation loans are secured against property. You may have your property repossessed by the lender if you default on your repayment.

There are a few different types of debt consolidation loans. If you own your home, you can use your house to avail one. Since it would be a secured loan, it would carry a low interest rate. If your house is already mortgaged, a home equity loan may be your answer. These are loans equal to the value of your home minus the unpaid balance on your mortgage. You could also obtain a personal debt consolidation loan, but the high interest rate of an unsecured personal loan would most like defeat the purpose of the debt consolidation anyway.

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