Debt consolidation loans can really help people get out of their debt, if they are done correctly. There are several disadvantages you need to be aware of before getting involved with debt consolidation. In this article, we’ll discuss what to look out for and how these loans can help you.
Advantage of Debt Consolidation
The advantage of debt consolidation is that you can combine all your debt into a single bill. Most of the time, you end up with a lower interest rate and a longer payoff term. This in turn lowers the amount of money you have to pay each month. However, many of the offerings you get in the mail for debt consolidation are bad deals. Those pre-approved loan offers are unsecured loans. They’ll advertise a low rate, but if you’re ever late on a payment the interest rate will go as high as it can. This will leave you in an even worse position than when you started. Avoid any loan offer you get through the mail.
However, if you have equity in your home or some other form of collateral, you can use that to secure the loan. A secured debt consolidation or home equity loan is the way to go in this situation. Let’s talk more about this option.
First, let’s talk about the advantages about this type of loan:
- You will only have a single payment, which is easy to automate. This is really good if you’re a disorganized person.
- The interest rate is also likely to be lower than most credit card rates, especially if you use a home as collateral.
- There is a possibility of getting a tax break on the interest
- You’ll only have to deal with one creditor if there’s ever a problem of a late payment.
However, there are three major disadvantages to this type of loan:
- First, you’ll suddenly be open to accruing greater debt, especially if you have credit cards.
- If you fail to pay back the loan, your collateral (likely your home) is at risk.
- It’s very tempting to take out more money than you need, especially if you have a lot of equity in your home.
If you can borrow just what you need, avoid getting more debt, make timely payments, and pay ahead as much as possible, you’ll come out ahead in a debt consolidation loan. Remember that you should only take this option when you have some way to secure the loan to avoid a potentially ruinous interest rate. Like with any other loan, a good solid financial responsibility plan will carry you through.
[Editor’s Note: Before you go the debt consolidation route, be sure to review your debt payoff options to see if you can pay off your debt on your own.]