Debt Consolidation: Pros and Cons

Whether you’re on the edge of bankruptcy or trying to manage your finances, you can’t help but notice all the ads touting debt consolidation. So, is debt consolidation a good option for you? Read on to learn more about the different debt consolidation options and the pros and cons of each.

What Is Debt Consolidation?

Debt consolidation gives you a single loan to pay off all of your other smaller loans, leaving you with one monthly payment rather than several. The theory is that one payment will be easier to handle. The goal of debt consolidation is to lower the interest rate and monthly payment while paying off your debt quickly.

Debt Consolidation Through Secured Loans

There is a range of options for debt consolidation using secured loans. You can take out a second mortgage, refinance your house, or get a home equity line of credit. But could any of these be the right option for you?

Pros of Consolidating With a Secured Loan

Most of the time, secured loans carry lower interest rates than unsecured loans. This saves you money on interest payments. Lower interest rates will make the monthly payments lower and more affordable. This will ease your financial burden substantially. Secured loans are also easier to obtain since they carry less risk for the lender.

Cons of Consolidating With a Secured Loan

When you pledge an asset as collateral, you’re putting the property at risk. If you can’t pay back the loan, you may lose your house, retirement fund, car, life insurance, or whatever else you may have used to secure the loan.

Debt Consolidation Through Unsecured Loans

An unsecured loan requires the borrower to have good credit. Accepting a no interest, or low-interest rate on a credit card is used as a substitute for an unsecured personal loan for debt consolidation.

Pros of Consolidating With an Unsecured Loan

The biggest benefit to this type of loan is that no property is at risk. Though interest rates might be higher than a secured loan, they might be less than what is charged on multiple different credit card balances. This will lower your interest burden and your payment.

Cons of Consolidating With an Unsecured Loan

An unsecured debt consolidation loan can be hard to get if you don’t have sterling credit. Most of the time, people who need debt consolidation don’t qualify. If you’re unable to pay the debt off, you might end up paying higher interest once the special offer period runs out.

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