Debt consolidation loan: pros & cons

24 November 2008

Being in debt with a number of creditors can be a stressful situation. If the debts become unmanageable, it can become a balancing act – trying to ensure you’re paying off the ‘priority’ debts, while keeping a close eye on the rest.

Of course, in reality any debt is a priority – and it’s important to ensure that they are all being paid off.

If your monthly payments are becoming too much of a burden, a debt consolidation loan could help. It allows you to group all your debts into one, meaning you only pay one creditor instead of many.

What’s more, it can potentially lower your monthly payments, which can be a lifeline to people who are pushed to the limits by their monthly outgoings.

Debt consolidation loans can also be taken out by people with smaller debts – some people simply enjoy the convenience of single monthly payments.

Here we look at the pros and cons of debt consolidation loans, to help you decide if it could be the right debt solution for your circumstances.

Pros

• Lower, single monthly payments. When you take out a debt consolidation loan, you can spread out your monthly payments across a longer time period, meaning you pay less each month.
• Not only that, but interest rates can be reduced in many cases, especially if you are consolidating high-APR debts such as credit cards.
• Protect your credit rating. A debt consolidation loan pays off all your existing creditors, meaning no more missed payments. In fact, so long as you stick to the terms of your loan agreement, the additional credit activity could even improve your credit rating.

Cons

• You could pay more in the long run. If you choose to spread out your payments, you will pay more in interest than if you had repaid the debt consolidation loan in a short period of time. That said, the savings made compared with the interest on your original debts could still be higher.
• Debt could take longer to pay off. Although spreading your debts out over a longer period of time will mean your payments are lower on a month-to-month basis, it will also mean that your debt is a burden for longer. Some people prefer to pay more each month and repay the debt more quickly.
• It’s important not to start spending again. In some cases, people who reduce their monthly outgoings with a debt consolidation loan can be tempted to spend more money, and this can lead to even more debt.

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