Pros and Cons of Debt Consolidation

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Pros and Cons of Debt Consolidation
Pros and Cons of Debt Consolidation (Image: mortgagebrokers.ie)

Debt consolidation is a strategy for consumers to combine their unsecured debt into one monthly payment. There are many reasons to choose debt consolidation, but just as many to avoid it. There is no magical solution for getting out of debt, and you should carefully research any debt consolidation company before you sign for a loan.

Identification

Debt consolidation loans can be secured or unsecured. Secured loans require collateral, such as your home or your car, as a basis for the loan. Unsecured loans are based on the character of the borrower and their ability to repay the loan. When considering a debt consolidation company, always ask about fees, the interest rate you will be paying and the monthly payment for your loan.

Types

Some companies entice you with the promise of a lower monthly payment, which is good, but your debt consolidation loan will likely cost you more than your current debt over the life of the loan. Higher interest rates and longer payoff periods mean more cash in their pocket, less in yours. For some consumers, this is not an issue as lower monthly payments and only one creditor are worth the extra money.

Time Frame

Debt consolidation companies claim that they can help you get out of debt much quicker than if you continued to make the minimum payments on your existing loans. This is true, but only if you continue to pay the minimum. Moneycentral.msn.com offers a debt consolidation calculator that enables you to determine whether a debt consolidation loan is in your best interest (see Resources below).

Effects

Debt consolidation companies negotiate lower interest payments with your creditors, stretch out your payment options and pay off loans with the highest interest first. They charge you a fee for this service, but you can do it yourself and save more money. If you're a homeowner, you may want to consider a home equity loan as a means to consolidate your debt.

Benefits

Some people prefer not to deal with the hassle of calling their creditors and negotiating lower interest or longer repayment plans. They are more than happy to pay the debt consolidator a fee for this service. Also, one lower monthly payment offered by a consolidator is preferable to several larger monthly payments. Even if the interest rate is higher and the payoff is more in the long run, there are consumers who appreciate the availability of debt consolidation services.

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