Pros and cons of debt consolidation

The current economic crises has made it harder and harder for people to keep up with their debt payments. If that is your case, than you are probably considering a debt consolidation loan. The offers are everywhere, and if you were to believe the ads,the promise the answers to all your problems.

But before you go ahead and take the plunge, consider some of the pros and cons of debt consolidation.

If you are considering debt consolidation, then this means that you probably have several loans to pay at the end of the month.

Odds are you have a car loan, several credit card payments, house payments and a consumer loan.

You are probably also experiencing some difficulty making ends meet every month.  If this describes your situation, than you are probably a candidate for a debt consolidation loan.  Lets consider the pros and cons.

Here are some of the points in favor of debt consolidation:

• Make one monthly payment instead of many - It simplifies your financial life if you only have to make on payment every month to one creditor instead of figuring out who to pay, when, and how much.
• Save on fees - Since you only have to make one payment each month, your odds of incurring late fees and interest are very slim.
  
• Lower interest rate - Since a consolidated loan usually uses the equity of your home as collateral, which makes it a secured loan, the interest rate is lower than that of credit cards or other unsecured debt.
• Longer payment period - Consolidated loans usually have longer repayment periods than consumer loans, credit cards or personal loans. They can even have longer repayment periods than car loans, since homes usually outlast cars.
  
• Lower monthly payments - The lower interest rate and a longer payment period will reduce your monthly payment significantly.
• Tax deductible - Since the consolidated loan is a home equity loan, the interest paid each month can be tax deductible.
  

Now that we have looked at the positive points, lets look at the negative aspects of debt consolidation:

• Puts you home at risk - With a consolidation loan you are putting your home up as collateral. While your previous debts were not secured, this loan is guaranteed by the equity in your home. If you fail to keep up with your payments you risk losing your home.
  
• Prone to take on more debt - Since your credit cards are now debt free, you can more easily start overspending and get into financial trouble again.
• Spend more on interest - While your overall interest rate will be lower, the fact that you will be taking longer to pay off your debts means that you will end up paying a lot more in interest over the long term.
  

As you can see, there are both pros and cons to debt consolidation. Before making a decision you should consider your personal situation and weight each of your options carefully.

If you are interested in financial matters, consider reading more about these topics:

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• Debt Consolidation Scams
• Can you still buy a car after bankruptcy?
• Debt settlement vs debt consolidation
• Consolidating student loans