Pros and Cons to Personal Debt Consolidation Loans

If you’re like millions of other Americans, you’re probably finding it hard to make any headway on your debts and handle your living expenses at the same time.  With a few credit cards, personal loans and a mortgage, making minimum payments every month often isn’t enough to chip away at your debt.

As a result, a personal debt consolidation loan is a popular option for people who have gotten in over their heads and want to better manage their debts.  But as with any financial commitment, there some benefits and disadvantages of personal debt consolidation loans.

Pros of a Personal Debt Consolidation Loan

• Single monthly payment: A debt consolidation loan lets you roll a number of debts into one loan.  By making only one monthly payment, you won’t have to keep digging through your records to see when you last paid your bills and avoid late charges.
• Only one creditor: With a debt consolidation loan, you will only have one creditor to deal with if you experience any problems or issues.  With just one phone call to make, keeping track of your finances is much easier.
• Reduced interest rates: The most common type of debt consolidation loan is the home equity loan, or second mortgage.  Since this is based on a secured asset, this type of loan will have a lower interest rate than most other loans and credit cards.
• Lower monthly payments: Because the interest rates on debt consolidation loans are lower, and you only need to make one payment rather than many, your monthly payments will be much lower.

Cons of Personal Debt Consolidation Loans

• Longer time to pay off your debt: Although credit card payments can be high, with careful planning you can usually pay off your debts in just a few years.  Since the typical debt consolidation loan is a home equity loan, it can take you the length of your mortgage (10-30 years) to pay it off your new debt.
• Risk of further debt: A debt consolidation loan will not help you if you’re poor at budgeting and managing you money.  If you get into trouble paying off your debt consolidation loan, you’ll end up hurting rather than helping your overall debt load.
• More expensive in the long term: Although the interest rates of debt consolidation loans are low, you may end up spending more over a 30 year period than you would if you had paid off each creditor individually.
• High financial risk: The worst that will happen if you fail to pay your credit card bills is that your credit score will go down.  However, since debt consolidation loans are based on secured equity such as your home, you can lose everything if you fail to meet the terms of your loan.

Is a Personal Debt Consolidation Loan Right For You?

There’s no easy answer to determining whether a personal debt consolidation loan is right for you.  Your best option is to consult with a financial professional who can help you sort through the many solutions available for handling your debt.