Every important decision we make in life is preceded by a time of thoughtful consideration, and for the wise, a great deal of study and comparison of the options that are involved. A debt consolidation loan is one of those important issues, an important option to consider when attempting tackling overwhelming debt. Looking at the pros and cons will help you decide if a debt consolidation plan is right for you.
The Nuts & Bolts of Consolidation
Debt consolidation is when a number of short-term unsecured loans (credit cards, personal loans, etc.) are rolled into one, long-term, secured loan. One monthly payment is paid to the consolidation company or credit counseling agency, who in turn will make the individual payments to the individual creditors. A debt consolidation plan eliminates the need to make separate payments to each of your creditors. It is generally a bad idea to accept a consolidation plan as a way of extending credit; however, for those who are willing to budget prudently, they can be an excellent way to address debt issues.
The Pros of Consolidation
Peace of Mind - Perhaps the most unappreciated benefit of a consolidation plan is the stress relief that comes when what was considered out-of-control becomes manageable and a positive end is in sight.
Simpler Debt Management - Manage a single, predictable loan payment instead of multiple ones will simplify monthly payments.
Lowered Interest Rates & Minimum Payments - Creditors may lower the interest rate or the minimum monthly payment on the debt you owe, while working with a debt consolidation plan, effectively saving you money just for choosing to consolidate your credit accounts. A drop of a few percentage points can free up funds that can be applied to a savings or retirement account.
Reduction in Monthly Payments - Debt consolidation will normally reduce totally monthly expenses. In addition, with repayments spread out over a longer period of time, monthly payments are typically significantly lower.
No more Late & Overdraft Fees - Many people who are struggling to management their finances know the frustration of being charged for late payments and going over-the-limit. With a debt consolidation plan, these are no longer a problem.
Accounts Closed - When a creditor agrees to a consolidation plan, they will require the account be closed to further charging until the balance is paid off. Although you may see this as a negative, any actions that prevent the addition of more debt will help you learn to rely more upon your income and less on credit.
The Cons of Consolidation
Risks of a Secure Loan - While personal and credit card loans are unsecured, deconsolidation is typically a secured loan that requires collateral, typically your home. This puts your home at risk, if you fail to keep up repayments.
Accounts Frozen - When a creditor agrees to a consolidation plan, they will require the account be closed to further charging, until the balance is paid off.
Difficulty in Securing New Credit - Even though it goes against your efforts of getting out of debt, there are times when a new credit account may be necessary, like for an emergency.
Higher Total Interest - With a longer term loan, the total interest paid over the life of the debt will be higher.
The advantage of having only one monthly payment, especially for those who have had problems juggling multiple payments, cannot be overstated for the advantages. The impact on your credit report will be positive in the long run, but may have a negative impact right after a debt consolidation plan is accepted. Contact one of our agencies to determine if they have a plan that meets your needs.
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