Debt Consolidation Pros And Cons

Debt Consolidation Pros And Cons

Debt consolidation has become a popular way to reduce interest rates and monthly payments for people that owe money to several different creditors each month.  In spite of its popularity, debt consolidation is NOT the best solution for everyone.  Before you agree to a debt consolidation process, analyze the pros and cons of this tool.

DEBT CONSOLIDATION PROS:

Money or credit for debt consolidation is relatively easy to obtain.  Often, homeowners can use the equity built up in their house.  To do this, they borrow against the equity (basically, take out a second mortgage).    Another way to get money for debt consolidation is to obtain a debt consolidation loan.  Again, these loans usually backed by some type of collateral, act very much like 2nd mortgages.  Zero interest credit cards are another method for getting money to consolidate loans.  Consumers with relatively good credit can use this option with fewer risks.

Lower interest rates - Most debt consolidation plans have lower interest rates than what is currently being paid and that makes them attractive.

Lower monthly payments - Lower interest rates mean that the monthly payment amount is less.  For people that are struggling to make multiple monthly payments, this eases the stress.

Simplicity - Debt consolidation allows consumers to make a single payment each month to cover ALL their credit accounts instead of making individual payments to each creditor.  Overall, it simplifies record keeping while it reduces the likelihood of “forgetting” a payment.

Potential to pay debt off sooner rather than later - With lower overall interest rates, it is possible to pay less over time and erase the total debt sooner.

DEBT CONSOLIDATION CONS:

It puts assets at risk - Most of the time, debt consolidation involves converting unsecured debt into secured debt.  In order to do that, the debt consolidation lender requires some type of collateral.  Certainly, that raises the stakes of non-payment, even if the payment amount is lower.

Debt consolidation candidates are more susceptible to predatory lending - Consumers that are struggling to make monthly payments are more likely to be desperate and willing to agree to whatever terms are available in order to get money for the short-term crisis.  Later, these consumers are stuck in agreements that take advantage of them.

There is a potential to “max out” credit again - Debt consolidation does not do anything to eliminate the potential for going further into debt.  It just moves the debt to another place and creates a false sense of security for people that have not changed their behavior. 

Lower interest rates and payments can mean longer loans - One of the ways that debt consolidation lenders can provide lower rates is to spread payments out for a longer period of time.  If this is the case, consumers can end up paying MORE, over time than they would have it had paid the original creditors directly.