If your bills are stacking up and your payments are threatening to get out of hand, you might be tempted to apply for one of the consolidation loan offers gracing your mailbox each month. There are advantages to paying off your debt this way, but there are some downsides to contemplate as well.
Let’s take a look the pros and cons of debt consolidation.
Debt Consolidation Pros
Lower Monthly Payments
A debt consolidation loan gives you the ability to pay all your creditors at once, leaving you only with the payment you need to make to the issuer of the loan. This means all of your bills are combined into one, usually at a lower rate of interest — and with a lower monthly payment. This could be a real boost to your monthly budget, as it will leave you with more cash to do other things.
Debts Paid Off Sooner
Another benefit of that lower interest rate is the ability to repay the debts sooner. Let’s say for example you have outstanding debt in the amount of $6,000 at 15 percent annually. A minimum payment of $120 monthly would satisfy that debt in seven years, at a total cost of $9,743. However, that same amount at eight percent would be repaid in only five years at just $7,323 in total. That’s a savings of two years of your life — with $2,150 in your pocket.
Easier Budgeting
Crafting a household spending plan becomes much easier with but a single monthly payment to manage. It’s possible to miss one or two bills if you have a lot of different creditors. You’d then be looking at the litany of late fees and interest rate increases card issuers impose when debtors miss payments. This has the added benefit of keeping your credit score looking good, as late payments will count against you with credit bureaus.
A Tax Advantage
If you secure your consolidation loan with the equity you have in your home, the interest payments you make on that loan can be used as a tax deduction. After all, you are taking a second mortgage on your home and the IRS considers home mortgage interest a legitimate deduction.
Debt Consolidation Cons
You Could Make the Problem Worse
Let’s say you have three cards, each one is charged to its limit and you have $24,000 in total debt. You take a consolidation loan, pay them off and you now have three credit cards with no balance and up to $24,000 of room on them you can use to begin charging again. However, you also have the monthly payment you’ll need to make to cover the consolidation loan.
If you then proceed to run those cards back up to their limits…
You Could Lose Your Property
When you take a secured loan against your home, retirement fund, an insurance policy or whatever, you’re putting that asset at risk. In essence, if you take a home equity loan to pay off credit card debt, you’re trading unsecured debt for secured debt. If you default on the cards, the worst thing that can happen is a huge ding on your credit score for seven to ten years — depending upon how you handle the default. If you default on that consolidation loan, the creditor could take your house to satisfy the debt.
With the pros and cons of debt consolidation in mind, a better play for those struggling in a sea of debt might be to consult a company like Freedom Debt Relief to explore a strategy like settlement for getting your debts under control. These firms have trained professionals who will help you evaluate your situation so you can chart your best course of action, and you may find you’re able to successfully negotiate your debts down to a more manageable level.
If you’re feeling overwhelmed by your debt, don’t be too hard on yourself. Most Americans are carrying debt at this point. What’s important is how you deal with it.
