A debt consolidation loan is a debt repayment strategy. The loan merges (or “consolidates”) two or more debts into one. The borrower then pays off these debts with one monthly loan payment, at a set interest rate.
The purpose of debt consolidation loans is to streamline the process of paying off multiple debts and eventually free consumers from debt.
That being said, debt consolidation loans don’t work for everyone; alternative kinds of debt consolidation, such as debt consolidation programs, can be better alternatives.
Here’s a list of the pros and cons of debt consolidation loans.
Pros of Debt Consolidation Loans
Essentially, debt consolidation is a form of debt refinancing, which, to be clear, is not the same as debt restructuring.
Credit unions, finance companies, and banks are authorized to issue debt consolidation loans.
Before you consider the pros of debt consolidation loans, see if you can qualify for them. Then learn whether the debt consolidation loans you would like to apply for have lower interest rates than the average interest rate you’re paying currently on your individual, high-interest debts. Last, figure out whether debt consolidation loans will be enough to pay off all your individual, high-interest debts.
If you do not qualify for a debt consolidation loan, or if a debt consolidation loan would not benefit you, then other forms of debt consolidation, like debt consolidation programs, might be a better option.
Debt consolidation programs (DCPs), unlike debt consolidation loans, do not require you to have good credit.
Here are the pros and cons of debt consolidation loans.
Pro 1: Streamlines Debt Payments
The most obvious pro of debt consolidation loans is that they can make paying off two or more existing debts easier. Rather than having to pay off each existing debt individually, consumers make only one monthly overall payment, at a set interest rate.
Pro 2: Lower Monthly Payments
Monthly debt consolidation loans can cost less than the combined cost of existing debts by spreading out future payments over longer loan terms.
Pro 3: Lower Interest Rate
Debt consolidation loans can come with decreased overall interest rate.
Pro 4: Quicker Payoff
Debt consultation loans can come with less interest than individual loans.
Pro 5: Decreased Risk of Fiscal Emergencies
By offering a lower interest rate, debt consolidation loans can reduce the risk of fiscal emergencies like insolvency or bankruptcy.
Those are the main pros of debt consultation loans, but these loans don’t work for everyone. In some cases, the cons may outweigh the pros.
Cons of Debt Consolidation Loans
Con 1: Looks May Deceive
Debt consolidation loans can make it look easier than it really is to pay off multiple debts. Because debt consolidation loans appear so great, consumers may forget that it won’t solve their underlying financial issues. For instance, if consumers have trouble budgeting, debt consolidation loans won’t necessarily help. On the contrary, they may even encourage consumers to increase their spending by making them believe they have more money than they do. This may lead consumers even further into debt.
Con 2: Increased interest rate
Consumers whose credit score is too low to qualify for a lower interest rate may have to pay a higher monthly income rate on their consolidated loans than they would for their already existing debts combined.
Con 3: More Costs
When consumers use debt consolidation loans to consolidate their debts, they may have to pay added costs including balance transfer fees, annual fees, and origination fees.
The Bottom Line
Whether or not a debt consultation loan is right for you depends on your credit score, income, financial and personal goals, debt-service ratio, and more. If a debt consolidation loan is not right for you, but you would still like to consolidate your debts, there are alternative debt relief options, such as debt consolidation programs.
