Pros and Cons of Debt Consolidation

Borrowers who are having hard time catching up with the payment of their existing accounts usually turn to debt consolidation loans for help. Several outstanding loans are paid in full simultaneously using this loan in order to avoid negative notes on a credit report. Old loans are lumped together and paid through a new single account by a debt consolidation firm. The term of the loan is usually longer and with a lower interest rate. Like other loans, debt consolidation loan has pros and cons. As a borrower, you should closely examine them to determine if it’s beneficial for you or not. Weigh its advantages over the disadvantages and see if the scales tilt in your favor.

Why Use a Debt Consolidation Loan

When credit companies start calling your attention to pay promptly or else they will put on hold your credit line privileges, that adds up to the burden on your shoulders. You begin to think how to negotiate a single clean loan and wipe out all your outstanding debts. This idea is what debt consolidation offers. It consolidates all your unpaid debts which include credit cards, utility bills or even your car amortization and in one lump sum pays all these credits. It’s a new loan that’s equal to the outstanding loans paid and this is granted by debt consolidation firms. They charge a minimal fee for their monthly services on top of the interest of the loan granted. The new loan normally carries a more affordable interest rate but it has a longer date to pay which results in a lower monthly payment schedule. The tight financial fix that you are in plus the attractive features of lower interest rate and extended loan term are the convincing reasons why so many people resort to debt consolidation loans.

Basically, if you have a consistent favorable credit standing and good proof of steady income, a debt consolidation loan requires no collateral. But this does not apply at all times. Debt consolidation firms have their own individual credit evaluation requirements where some are more particular on collateral. So if you plan to apply for a debt consolidation plan, try to reach out the firm that you want to deal with and inquire about requirements. After studying your situation vis-à-vis the pros and cons of this loan, follow what you think is best to solve your problem. You can always file the loan consolidation proposal online with the lender of your choice on the Internet or with the nearest debt consolidation company where you reside.

Advantages of Debt Consolidation Loan

The premier advantage of a debt consolidation loan is that you can pay off your maturing loans through a new single loan before they are reported as defaults to credit reporting companies. And this timely action can get you a better standing in terms of a credit score. This approach will eliminate your problem of paying several accounts every month. Now under this consolidated loan account, you are obliged to pay to only one creditor. The debt consolidator has taken off the burden from you.

A lower interest rate is also another advantage of a debt consolidation loan. It’s not hard to have a lower interest rate if you have a good credit report. The situation will be more favorable to you if you have a reliable regular income. If these two factors are in your favor, there’s also the opportunity that the lender will grant you the loan. Similarly, if you are experiencing financial troubles, then an expanded time frame to settle the new loan is advantageous to you at the moment. You will have the chance to spread thinly your cash to cover more installments in the coming months. The longer payment term the better for you until you can get back on track again.

The Disadvantages

There are instances that debt consolidation contributes to further deterioration of your credit performance. Although this sort of credit may sound enticing at first glance, it can actually drag the consumer down further to financial quagmire. If you have a bad credit, finding a debt consolidation company with a fair interest rate is not easy. In fact, it can be close to impossible to find lending institution that will give you a loan. In most likelihood, you’ll end up with a creditor that offers a high interest rate and with collateral requirement.

Some people stay away from debt consolidation loans because of the longer payment period. Although this may seem like an advantage to most individuals, it actually keeps you indebted for a longer period of time. In addition, the longer the payment period is, the bigger the total amount of your payments would be in the long run when you sum them up. To your surprise even the minimal monthly fee could run to a thousand dollar when totalled.

Find Alternatives

Instead of automatically applying for a debt consolidation loan, it would perhaps be wiser to first seek alternative ways in getting financial assistance through other sources. You can find other solutions by doing your homework. Surf the internet for ideas and tips on how to pay off your existing debts without resorting to loans. One of the best ways in paying your accounts at short notice is to ask for financial help from your friends and relatives. Even if you can’t have the exact amount from them, a small amount from several people could produce what you need. We all know that money from a friend or relative regardless of its amount is always better than having a loan with an interest from a credit company. If you can rely on friends and relatives, it would be unwise for you to still resort to negotiating a debt consolidation loan with all the hassles attached to it.

Some would view that the downsides of a debt consolidation loan clearly outweigh its advantages though others would say otherwise. As a borrower, you need to think twice before taking out any type of loan. You should try other options, especially if you are already struggling with your present payments. If you take another loan, it will only pile up as an additional burden once the bill starts coming in. If you are having difficulties with your payables, you can try other options like getting another job to settle them. Seek professional advice that could direct you to other sources of funds to pay off your maturing loans. A debt consolidation loan will not reduce your loans. Find other ways to meet your financial responsibilities head on. Perhaps cutting your expenses drastically or a strict budgeting could be the first step in the right direction.

Categories: Consolidating debt | Comments Off on Pros and Cons of Debt Consolidation