Every crucial decision in life should be taken after thoughtful consideration which requires lot of research and comparison of alternate options before choosing anything. A debt consolidation loan is an important option when considering personal finance which is essential in cases of handling overwhelming debts. Take a look at the advantages and drawbacks of debt consolidation plan so that you can decide whether it is suitable for you.
Debt consolidation is the combination of many short-term unsecured loans like personal loans, credit-card bills into a single long-term secured loan. You will to have make a monthly payment to credit counseling agency or consolidation company, that will take care of individual payment to other creditors that you owe. By taking a debt consolidation loan, you can avoid wasting time and effort in paying every creditor separately. It is usually a bad idea to opt for debt consolidation, but if you plan your budget well then you can solve debt issues easily through debt consolidation.
The Advantages of Debt Consolidation:
- Easier Debt Management; Instead of paying to multiple creditors, you can easily a manage a single loan payment which will simplify your work and reduce the time needed to manage monthly payments.
- Peace of Mind: You will get relived from additional stress in managing the out-of-control debts from different sources.
- Reduce rate of interest and minimum payments: Creditors will reduce the rate of interest and minimum monthly payments with the amount of debt you owe them, when you have a debt consolidation plan which can save you time and money. Also drop of few points can help you free funds for retirement or savings account.
- Reduction in Monthly Payments: Debt consolidation can reduce your monthly expenses totally. As repayments spread out over longer duration, the monthly payments will be less.
- No more Overdraft of Late fees: Lot of people are struggling in managing their finances and they find it difficult to make payments on time. They get fined for going over-the-limit and for late payments. There is no longer any problem with debt consolidation plan.
Disadvantages of Debt Consolidation
- Risks of secured loan: While credit card and personal loans are unsecured, debt consolidation required secured loan which demands submission of collateral like any properties usually your home. It places your home at risk if repayments are difficult for you.
- Accounts Frozen: When a creditor accepts consolidation plan, the account will be closed which is quite a drawback.
- Higher Total Interest: The total interest paid will be high as the loan duration will be longer.
- Getting New Credits is Tough: Though you want to get out of debts, sometimes you might require a new credit account in case of emergency situations.
There are some benefits as well as drawbacks in opting for a debt consolidation plan. So, you should decide whether it is necessary for your or not based on your current financial situation by consulting your accountant.