Good and Bad Points of Debt Consolidation

Debt consolidation is a debt-relief program that entails you obtaining a loan and using the money to pay off debts. You may achieve debt consolidation with many different types of loans, but before you decide to pursue debt consolidation, you must first understand the good and bad aspects involved in your debt-relief program.

Good Aspects of Debt Consolidation

• Easy-to-manage budget: Making one payment each month on your debt consolidation loan is easier than paying multiple creditors.
• Less likely to make late payments: Figuring out when to pay a specific credit card company can lead to late payments. However, debt consolidation loans combine you payments to ensure you never miss a due date.
• Extend your debt repayment: Some debt consolidation loans feature a 30-year repayment term, which yields low monthly payments. By paying less each month, you relieve the strain on your income.
• Halt collection calls: You use the proceeds from the loan to pay off creditors, which eliminates outstanding debt balances and halts collection actions from various agencies.
• Pay a lower interest rate: The interest rate carried on your debt consolidation loan is likely lower than the rates on most consumer debts.

Bad Aspects of Debt Consolidation

• False sense of freedom: A smaller debt load and additional money left over after debt consolidation often fuels a false sense of financial freedom. This makes it easy for you to incur more debt and use credit cards for everyday purchases.
• Extended repayment length: Despite paying a lower interest rate on your debt consolidation loan, you’ll pay more in interest charges by funding the loan for 15 to 30 years.
• Collateral required: The most common debt consolidation methods involve secured loans, which require you to post collateral as security against repayment. This means that if you default on the payments, then you lose the collateral.
• Repay entire debt amount plus interest: Unlike other debt-relief programs, such as debt settlement, debt consolidation requires you to pay back the entire amount of debt (the loan amount) plus interest to the lender. Debt settlement by Credit Solutions reduces your credit card debt balance.
• Credit check: You must qualify for a debt consolidation loan, which means passing a credit check and background check. Borrowers with poor credit histories will either not receive the loan or receive it with a high interest rate.

Author Bio: Settle your debts today! Read about debt relief from financial writer Brad McDonnell, who is an expert on personal finance topics involving debt consolidation.