12 Pros and cons of debt consolidation

In the consumer based society of the modern world debt is apart of life and existence. Advertisements, brochures, news reviews and more promote spending what you have not earned and the end result is debt. After debt reaches epidemic proportions, the marketing whizzes focus on how to consolidate debt. The TV, radio, web sites, magazines, and newspapers call carry advice on solving debt and how debt consolidation can be the answer to your prayers.

An average US family has at least four credit cards with all the available credit used up, a home loan, car loan, education loan and a consumer loan. Soon the payments owed every month are higher than the income. The world in reality is not all sunshine and debt has its ups and downs.

Here are a few important pluses and minuses of debt consolidation:

* Pluses:

a. You club all loans into a single one and work out a feasible EMI and interest rate. b. Most consolidation loans carry a much lower interest rate in comparison to other credit card or consumer loans. The most popular being the home equity loan. c. Consolidation means a lower monthly payment to be made over a longer period. It is important to try and pay back not the minimal EMI but the largest possible. d. Many home equity loans come with a tax breaks which in the long run is a saving. e. Instead of juggling many payments at different interest rates you need to only provide for the steady repayment of a single consolidated loan. And there are no tensions of delayed payments, wrong amounts paid or forgotten payments. f. Consolidating debt means avoiding declaring bankruptcy. By consolidating debt and formulating a financial budget you can hope to improve credit scores as well as reports. g. By taking the debt consolidation step at the right time you will be able to start life afresh and learn how to manage your finances without the accompanying tensions of loans owed.

* Minuses :

h. Many individuals are unable to discipline themselves and once funds are available they begin binging creating more debts and slipping into deeper debt instead of swimming to safety. i. Consolidation loans have long tenures, say 10-30 years. This means instead of clearing debt in say two years at high interest rate you will be clearing the loan over several years. You will be tied down and your property or asset will remain mortgaged to the home equity loan. j. In depth calculations indicate that you may land up paying more as the loan will be paid over many years. In addition any late fees and penalties you may incur will add to the burden. k. Since the debt consolidation loan has your home or property as collateral you stand to loose the collateral if you do not pay or default on payments. l. Consolidation loans give a false sense of security and complacency. The urgency to pay debts of will not exist.

by Aaron Brooks