Pros and Cons of Debt Consolidation

Pros and Cons of Debt Consolidation

Pros and Cons of Debt Consolidation

Are you considering a debt management plan? Debt consolidation is very effective way to find debt relief, so understanding its pros and cons is very important.

What Is Debt Consolidation?

If you have incurred debt because of a mortgage, credit card debt, student loan or any other personal debt, consolidation is one of the most preferred debt management solutions and can be a life saver. It facilitates the merging of your entire debt so you can make one single payment. Because there are no separate payment options, you are saved from non-payment or delayed payment on your debt.

Debt Consolidation Sources

Debt management analysts suggest that there are three prominent sources for debt consolidation. They are:

Personal loan

Balance transfer through credit card

Home equity loan

Pros & Cons of Debt Consolidation

The basic objective of debt consolidation is to lower your interest rate and streamline your monthly payments. Debt management analysts agree that it is a better idea to consolidate multiple debts through a personal loan, a credit card balance shuffle or a mortgage, as in a home equity loan. With a lower interest rate and longer repayment period, debt consolidation reduces your debt payment significantly when compared to multiple credit payoffs.

However, there is one drawback. Since the interest rate is lower with debt consolidation, paying off the debt will take longer. Debt management experts warn to be cautious or you might end up paying more than the original loan amount because of this. Just make sure the interest rate of your debt consolidation is not significantly lower than the credit card interest or it could take you a decade to pay off the consolidated debt.

Debt consolidation through a home equity loan has another advantage - the interest you pay can earn you a tax deduction. This is a huge plus for your debt management strategy.

Risk Factors in Debt Management

Risk factors can add up when it comes to debt consolidation. For instance, debt consolidation through your home mortgage increases the risk of losing your secured assets, like your home or other properties. Even though the interest rate is higher with credit card debt, at least your assets are not at risk. That's why it is recommended to be certain before you change your unsecured debt into consolidated debt. Make the change only if you are prepared to start make monthly payments on time.

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