Many people who are struggling with overwhelming debt turn to debt consolidation loans to repay creditors and avoid bankruptcy. And while there are many benefits of debt consolidation, there are also many drawbacks that could force you into a bankruptcy. Let’s take a look at the pros and cons of debt consolidation:
Pro: Simplified Payment
One of the biggest benefits of debt consolidation is the simplified way you make payments. Instead of paying ten different lenders, you make one easy payment. If you have trouble remembering who should get paid then debt consolidation this is great way to avoid that problem.
Con: All Debts Consolidated
Debt consolidation loans are great for unsecured debts such as credit cards but become risky when adding secured debts such as a mortgage or car loan. If you fail to make payments on your consolidated loan this means that you mortgage and car loan doesn’t get paid. Non-payment of these bills could mean you’ll face foreclosure on your home and repossession of your vehicle. For most this type of consequence is unacceptable, so they end up filing bankruptcy to save their home or vehicle. Ironically, in some cases bankruptcy could have been avoided if the debtor had not used a debt consolidation loan and had negotiated with their individual creditors instead.
Pro: Lower Interest Rate
Debt consolidation loans often deliver better interest rates than most credit cards and other unsecured loans. Many with debt consolidation loans find that both their monthly payment and interest rate are significantly lowered.
Con: More Interest Paid
While many debt consolidation loans offer lower monthly payments and interest rates, the loans can be more costly in the long-term. Because many debt consolidation loans are for longer terms, the borrower pays more interest over time, making the loan more expensive in the long run. Eventually, many people run into problems repaying the loan and are forced to file bankruptcy anyway. Unfortunately, the debtor loses out on the money they’ve already paid on the consolidated loan. It’s important that debtors carefully calculate the long-term cost of a consolidated loan.
Pro: More Disposable Income
Since debt consolidation loans can save debtors money by offering lower monthly payments, there’s more money left over at the end of pay period. This extra money can be used to build an emergency savings account or used to make extra payments on their consolidated loan.
Con: Potential For More Debt
The irony of debt consolidation loans is the very thing that makes them appealing can also make them dangerous—low monthly payments that make repaying debt easy. Many people with easy to pay debt consolidation loans take on additional debt because they have not changed their lifestyle or money management habits. They may take on another credit card or even get a new car loan. But eventually they’re unable to repay the loans and are forced to file bankruptcy because the debt is just too much to handle.
Debt consolidation loans are a great way to pay off debts under certain circumstances. However, those who have not dealt with their money management issues may eventually accrue more difficult to pay debt and be forced to file bankruptcy.