Debt consolidation is one of the most controversial and mostly discussed topics of financial world. Because of convenience attached with loan consolidation it has become widely popular in general public. It is frequently debated in talk shows on TV and personal meetings. Like anything in this world, there are some pros and cons of loan consolidation. This article contains some pros and cons of loan consolidation that will help you to make your decision more effectively and efficiently.
Pros/Advantages of Loan Consolidation
- When you accumulate your many loans into one loan you have to pay lower interest rate. For example, First bank charges interest of $100 per month, second $150 and third $50 per month. Now you decide to get another loan from another bank or any existing bank to pay off the three previous loans. This new loan is consolidated loan. New bank will charge you interest of $250 per month, you will save $50 per month.
- You can consolidate your credit card bills into one loan and further consolidate your already consolidated monthly bills. Credit card bills carry huge interest rate (28%-36%) and consolidated loan carries no more than 12% to 18% interest rate.
- You can make better financial planning if interest rate is fixed, and loan consolidation allows you to do so.
- Payment of one loan is easy to make as compare to several loans.
- It allows lengthening the time period of repayment of loans.
- You can get tax credit on federal loan consolidation program of educational loans.
- It improves your credit ratings as there are less chances of one payment being delayed as compare to several payments.
Cons/Disadvantages of Loan Consolidation
- Slogan attached with loan consolidation is to be “debt free”. But how can you be debt free by taking another loan?
- Loan consolidation just accumulates your debts into one debt. It does not lessen the amount of debt and you still have to pay this debt yourself.
- By lengthening the time period of repayment of debts, you actually increase the amount of interest that you pay.
- To get a consolidated loan, you need to provide something valuable to your lender. Some people provide their homes as security without knowing that they are putting themselves at a risk of losing their homes.
- Another benefit associated with debt consolidation is “tax credit”. Tax credit is not received on all the debt consolidation loans. It is received only in case if you get your educational loan consolidated by federal student loan consolidation program that is governed by government of United States of America.
Pros and cons of loan consolidation are mentioned above but cons of loan consolidation cannot negate its effectiveness. If loan consolidation is used in appropriate situations, its disadvantages can be reduced to lowest level.