The Pros and Cons of Debt Consolidation Loans

The Pros and Cons of Debt Consolidation Loans

You are deep in debt. You have all your credit cards maxed out, a car lease, a consumer loan, and a mortgage payment. Simply making the minimum payments is causing your distress and certainly not getting you out of debt. What should you do?

Consolidating loans is an good option to few people. A debt consolidation loans is one loan which pays off many other loans or lines of credit.

I'm sure you've seen the advertisements of smiling people who have chosen to take a consolidation loan. They seem to have had the weight of the world lifted off their shoulders. But are debt consolidation loans a good deal? Let's explore the pros and cons of this type of debt solution.

Pros

1. Single payment versus multiple payments: The average person in USA pays 11 different creditors every month. Managing your finances will much easier by making one single payment,than figuring out who should get paid how much and when.

2. Lower interest rates: Since the most common type of debt consolidation loans are taken against the home equity , also called a second mortgage, the interest rates will be lower than most credit cards, or consumer debt interest rates. Your mortgage is a secured debt. This means that they have something they can take from you if you do not make your payment. Credit cards are unsecured loans. They have nothing except your word and your history. Since this is the case, unsecured loans typically have higher interest rates.

3. Lower monthly payments: Since the interest rate is lower and because you have one payment vs many, the amount you have to pay per month is typically decreased significantly.

4. Only one creditor: You only have one creditor to deal with a consolidated loan. If there are any problems or issues, you will only have to make one call instead of several. Once again, this simply makes controlling your finances much easier.

5. Tax Breaks: Interest paid to a mortgage can be used as a tax write-off, verses interest paid to a credit card is money down the drain.

Sounds great, doesn't it? Before you run out and get a loan, let's look at the other side of the picture - the cons.

Cons

1. Easy to get into deeper debt: With an easier load to bear and more money left over at the end of the month, it might be easy to start using your credit cards again or continuing spending habits that got you into such credit card debt in the first place.

2. Longer time to pay off: Typically most second mortgages are the 10 to 30 year variety. This means that rather than spend a couple of years getting out of credit card debt, you will be spending the length of your mortgage getting out of debt.

3. Spend more over the long haul: Even though the interest rate is less, if you take the loan out over a 30 year period, you may end up spending more than you would have if you had kept each individual loan.

4. You can lose everything: Consolidation loans are secured loans. If you didn't pay an unsecured credit card loan, it would give you a bad rating but your home would still be secure. If you do not pay a secured loan, they will take away whatever secured the loan. In most cases, this is your home.

As you can see, consolidated loans are not for everyone. Before you make a decision, you must realistically look at the pros and cons to determine if this is the right decision for you.

Sunny Kesh is the owner of http://www.a-free-guide-to-bad-credit.com which aims to get you fitted with the best credit cards to suit your situation. With numerous credit card articles and easy online credit card applications you will never choose the wrong credit card again.