The Pro's
and Con's Of Debt Consolidation Loans
You are swimming in debt. You have 4 credit
cards maxed out, a car loan, a consumer loan, and a house
payment. Simply making the minimum payments is causing
your distress and certainly not getting you out of debt.
What should you do?
Some
people feel that debt consolidation loans are the best
option. A debt consolidation loans is one loan which pays
off many other loans or lines of credit.
I’m
sure you’ve seen the advertisements of smiling people
who have chosen to take a consolidation loan. They seem
to have had the weight of the world lifted off their shoulders.
But are debt consolidation loans a good deal? Let’s
explore the pros and cons of this type of debt solution.
Pros
1.
One payment versus many payments: The average
citizen of the USA pays 11 different creditors every month.
Making one single payment is much easier than figuring
out who should get paid how much and when. This makes
managing your finances much easier.
2. Reduced
interest rates: Since the most common type of
debt consolidation loan is the home equity loan, also
called a second mortgage, the interest rates will be lower
than most consumer debt interest rates. Your mortgage
is a secured debt. This means that they have something
they can take from you if you do not make your payment.
Credit cards are unsecured loans. They have nothing except
your word and your history. Since this is the case, unsecured
loans typically have higher interest rates.
3. Lower
monthly payments: Since the interest rate is
lower and because you have one payment vs many, the amount
you have to pay per month is typically decreased significantly.
4. Only one creditor: With a consolidated loan, you only
have one creditor to deal with. If there are any problems
or issues, you will only have to make one call instead
of several. Once again, this simply makes controlling
your finances much easier.
5. Tax
Breaks: Interest paid to a credit card is money
down the drain. Interest paid to a mortgage can be used
as a tax write-off.
Sounds
great, doesn’t it? Before you run out and get a
loan, let’s look at the other side of the picture
– the cons.
Cons
1. Easy
to get into further debt: With an easier load
to bear and more money left over at the end of the month,
it might be easy to start using your credit cards again
or continuing spending habits that got you into such credit
card debt in the first place.
2. Longer
time to pay off: Most mortgages are the 10 to
30 year variety. This means that rather than spend a couple
of years getting out of credit card debt, you will be
spending the length of your mortgage getting out of debt.
3. Spend
more over the long haul: Even though the interest
rate is less, if you take the loan out over a 30 year
period, you may end up spending more than you would have
if you had kept each individual loan.
4. You can lose everything:
Consolidation loans are secured loans. If you didn’t
pay an unsecured credit card loan, it would give you a
bad rating but your home would still be secure. If you
do not pay a secured loan, they will take away whatever
secured the loan. In most cases, this is your home.
As
you can see, consolidated loans are not for everyone.
Before you make a decision, you must realistically look
at the pros and cons to determine if this is the right
decision for you.
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Wesley Atkins is the owner of http://www.credit-cards-advisor.com-
which aims to get you fitted with the best
credit cards to suit your situation. With numerous
credit card articles
and easy online
credit card applications you will never choose the
wrong credit card again.
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