Debt Consolidation Loans

Debt consolidation is the process of taking out a new debt to pay off existing ones, usually in the hopes of making the repayments more affordable. Usually, debt consolidation loans are secured against your home equity. Your old loans will be settled and you will have a completely new deal with the debt consolidating company, so that you will pay them instead of your old lenders.

Basically, people start consolidating their debts when they become too huge and unmanageable. The repayment terms are adjusted so that they would fit your affordability. Usually, people opt for debt consolidation in order to avoid bankruptcy.

Pros

Easier debt management. With debt consolidation, you can handle your debts more easily because you won’t have to make multiple payments to several lenders. You won’t have to worry about which one to pay and you can make appropriate budget adjustments because there’s only one debt left to deal with.

Lower monthly payments. Probably the greatest benefit of debt consolidation is the ability to lower your monthly outgoings. When you start to accumulate bad debt, it’s really hard to get out, and paying the minimum alone with several lenders will bury you in debt forever. With consolidation, you are given a room to breathe with lower monthly repayments, so that you can slowly but surely reduce your debt until you get back on your feet.

Lower interest rates. We all know that many people fall into bad debt because of interests resulting from carrying balances and being late with payments. When you have lots of debt, the interest accrued every month is what makes it really difficult to bring it down. With debt consolidation, you can also negotiate for lower interest rates, especially if your home has good amount of equity, so that your loan won’t mount up as fast as before.

Cons

Makes the loan more expensive. When you consolidate your debts, it’s almost always certain that you’ll have to pay a higher price all in all for the loan. This is because in order to lower your monthly dues, the repayment period must be stretched.

Longer payment terms. As mentioned previously, the length of your loan will have to be extended in order for the lender to lower your interests or monthly payments. This means you’ll be in debt for a much longer period of time. The disadvantage is that it can cause strain on your budget for very long, and you won’t be able to take major financial moves while still paying off your loan.

Risk of losing your home. Debt consolidation usually requires a very large amount of cash, which is only possible to obtain by using your home as collateral. It can be very dangerous because you can lose your property if you fall behind on your repayments.