Debt Consolidation – The Pros and Cons

How Does Debt Consolidation Work?

Debt consolidation usually involves taking out a low interest loan at a fixed rate to reduce monthly payments. This often entails rolling many loan amounts into one. An asset is used as collateral for the new consolidated loan. The most commonly used asset is a home. This means that if the consumer defaults on the loan, they agree to allow the house to be sold to collect the remainder of the funds. This method of debt management is usually secured to pay off student loans or credit card debt that carries large interest rates that may increase frequently. There are pros and cons to debt consolidation.

The Positive Side of Debt Consolidation

On the positive side, it allows consumers to pay down the principle amount faster. As a result, credit scores may increase. This is especially useful when the consumer is trying to secure a mortgage to buy a home. The consolidation takes many small payments, with variable high interest rates and rolls them into one monthly payment with a lower interest rate. This takes away the stress caused by trying to manage many payment due dates to avoid late fees. The smaller payment makes it easier for most people to create a budget they can stick to.

Debt consolidation loans often extend the original terms of a loan. If the balance would have been due in six months, the deadline can be moved back to 12 or 18 months without penalty. If a home equity loan is involved, the interest may be tax deductible.

The Negative Side of Debt Consolidation

One of the disadvantages to this type of program is that it does not teach the consumer new habits, it just enables them to continue the bad spending habits that have already been established. If they don’t stop using their existing cards, debt will continue to build and their credit may be negatively affected.

Debt consolidation does not work for everyone. Many people believe that a consolidated loan is easy to get. While that may have been true at one time, it is not today. If your credit is still in good standing, it may be the most appropriate option. Though the monthly payments and interest rate has been reduced, the amount due has not. This means that the loan has been stretched out which will possibly take years to repay. It is only shifting the debt from immediate to long-term. Many people find debt settlement more appropriate for their situation.

Debt Consolidation Loans

A reasonable option to many people is a debt consolidation loan. However, a debt consolidation loan only works financially if you have a good credit rating and considerable equity in your home. A debt consolidation loan is typically more convenient for borrowers for several reasons. These loans come with interest rates considerably lower than those loans they are paying off, which are often high interest rate credit card companies or other lenders who may have financed their car or education. In addition, the minimum monthly payment on a credit consolidation loan tends to be significantly lower than the combined payments of the several loans the consumer was paying towards separately. Plus, having only one single payment to make reduces the headaches that can arise when a consumer has to keep track of multiple bills and their associated payments.

Debt Consolidation Programs

Because debt consolidation programs offer relatively low annual percentage rates on the loans they give out, the savings to consumers are substantial and immediate. Many credit card companies have extremely high interest rates, especially for consumers who have fallen behind on their monthly payments. The same is true of rates for other types of borrowing like auto or personal loans, particularly if the consumer has had past credit issues and is not a prime borrower. By taking out a debt consolidation loan, consumers can potentially save thousands of dollars over the life of the loan, particularly if they are prudent about setting aside extra money each month to pay down the principal balance more quickly than scheduled.

Some debt consolidation programs offer better rates than others, and timing the market to get the best deal can be challenging. Some programs may even allow loans to be secured against property, which make the loan safer for the lender, who will in turn pass on an even lower interest rate to the consumer.

Debtmerica’s Debt Settlement Program

Debtmerica Relief feels that, for the right candidates, its Debt Settlement Program provides a better, more complete solution than debt consolidation. Click the “Qet Quote Now” button below and fill out our contact form to speak with one of our qualified debt consultants. An IAPDA certified debt consultant will contact you to discuss whether or not you’d be a good candidate for debt settlement. At the end of your program and upon graduation, you will be debt-free from enrolled debt and able to consider big decisions like a home refinance or new home purchase because of your new, better financial position. By offering top debt settlement services to those who qualify, we help people like you become free from the burden of debt.