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Debt Consolidation: Pros and Cons

 

What is debt consolidation? When you consolidate debt, you take out a loan to pay off other debts and bills, leaving you with only one remaining debt - your loan.

 

Pros of Debt Consolidation

Debt consolidation offers two primary advantages: fewer payments per month and lower interest rates.

  1. Fewer Payments
    If you pay a $2500 car loan, a $2000 credit card bill, and a $500 emergency room charge, you could get a debt consolidation loan for $5000 and pay off those three debts. You still owe $5000, but you'll only have to make one payment each month.
  2. Lower or Fixed Interest Rates
    If you have high interest credit card bills, a loan can offer you a lower and/or fixed rate. Your interest rate helps determine your monthly payment, so if your rate goes down, your payment could too. A fixed rate means your loan payment will not change over the life of the loan. Credit card rates may change at any time, which can cause your monthly payment to increase over time. 

Cons of Debt Consolidation

 

  1. Interest Rate
    Know your interest rates. If the rate of the loan is higher than that of your current debts, consolidation may increase your monthly payments.
  2. Loan Term
    The length of time you have to pay off your loan is important. You want to have enough time to pay off the loan, but you don't want to have the debt hanging on longer than necessary.
     
  3. Closing Costs
    Many times with a loan, lenders tack on additional fees and charges. These are called closing costs, and you should add them to the loan amount to determine the full cost of the loan.

Should You Consolidate Debt?

It's important to consider the pros and cons of debt consolidation to ensure the costs do not outweigh the benefits. If you need assistance in deciding whether consolidation is right for you, contact a loan specialist who can answer questions about your individual situation.

 

This article is for informational purposes only. For personalized financial advice, you should contact a qualified financial advisor.