Advantages and Disadvantages of Debt Consolidation

You might have noticed an increase in credit card offers showing up in your mailbox over the last few months. It’s a troubling sign, since many will take advantage of these credit card offers to pay bills and may end up with a ton of high interest debt. Whether you are seeking debt pay-off strategies or ways to pay-off credit card debt, the fact remains, now is the time to act. For those with a lot of small loans or credit card balances, a debt consolidation loan might be an option worth looking into.

Lenders are out to make a profit and do so by adjusting the interest rate to account for risk and length of the loan, which is why smaller loans tend to have a higher interest rate. It’s often the reason payday loan companies have a bad rap, since they tend to offer short-term loans that can quickly balloon if the loan is not paid off under the terms. It can become quite burdensome and cause a lot of stress in your life if you have a few (or a lot) of these high interest loans or credit cards. The right debt consolidation loan should offer you a lower interest rate and reduced monthly payment to help you manage your debts.

For those considering a debt consolidation loan, here are some of the pros and cons of this debt repayment option.

Pros of Debt Consolidation Loans

Having the ability to bundle all of your loans into one monthly payment can help you manage your debts. Plus, the lower interest rate will benefit those that can repay more than the monthly payment each month. This will reduce the total amount you pay (principal + interest) and help you stay within your monthly budget.

Cons of Debt Consolidation Loans

The length of any loan is important. The downside to a lower monthly payment is a long-term repayment period, which means you will end up paying more over the length of the debt consolidation loan. Not every debt consolidation loan is equal and there are plenty of bad lenders to avoid. Always, always, always, read the small print very carefully. You might even ask a family member, friend or lawyer/financial professional to take a look, so you know that you are avoiding bad terms and conditions. You will want to watch out for early loan repayment fees, so you aren’t being penalized if you are able to pay the loan off early.

Avoid These Debt Consolidation Traps

If you decide that a debt consolidation loan is right for you, make sure you do not fall victim to these debt consolidation traps.

  • Lack of Research: If you don’t research your options, you may end up with a consolidated loan with higher interest or bad terms and conditions.
  • Predatory Lenders: In your attempt to find the right debt consolidation loan, you will inevitably come across predatory lenders. Avoid them at all cost. Remember, it is your decision on whether to consolidate your loans, not theirs!
  • Why Are You In Debt? You will need to identify the root cause of your debt. A debt consolidation loan will be ineffective if you keep taking on new debts.
  • Consolidate High Interest Debts: Just because you can, doesn’t mean you should consolidate all of your debts. If you have a few low interest loans, you might want to keep those separate.
  • Plan Ahead: Create a budget that helps you balance your spending and savings goals with your income. Make sure your budget accounts for an emergency savings fund, so when times get tough you don’t turn back to high interest debts.

Whenever you are making financial decisions that will have an impact on the rest of your life, take your time in making those decisions. Always do your research and know exactly what you are getting yourself into. If it’s right for you, a debt consolidation loan can help you crawl your way out of debt, improve your credit and get back on the a good financial path.

Have you ever utilized a debt consolidation loan? What were some of the terms you looked for before consolidating your debt? Share your tips and advice with our readers below.

  1. Robert, what a fabulous article on advantages and disadvantages of Debt Consolidation. Specifically I liked the part of the article very much, where you have discussed about the debt consolidation traps. Thanks a ton for clearing all the doubts. Keep up the great work dude. 🙂

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