Pros and cons for debt loans

[Sep 10, 2010.]

 

Many people struggling with credit card debt and other loans turn to debt consolidation loans. A debt consolidation loan could help you tackle debt, but borrowing money isn't always the right choice. Consider the following pros and cons of getting a debt consolidation loan.

Pros for debt consolidation loan

• A debt consolidation loan can help you lower the amount of interest you pay. By combining high-interest debt into one low-rate loan, you could save hundreds or thousands of dollars in interest charges.
• You can lower your monthly payments with a consolidation loan. Lower monthly payments leaves more cash in your pocket, allowing you to pay other bills or build up savings. Keep in mind, however, that the more you pay above minimum monthly loan payments, the faster you can dump your debt.
• A debt consolidation loan may have a lower interest rate than a credit card. While a balance transfer offer from your existing credit card company may be easy to activate, you may get a better deal with a new loan.
• You may be able to qualify for a consolidation loan at a credit union if you are a member. There may be fewer hoops to jump through than if you apply for a loan from a bank.

Cons for debt consolidation loan

• Using a debt consolidation loan can backfire if you start to use old credit lines again. Once credit card debt has been consolidated, stop using those cards and focus on paying down the balance.
• You may not qualify for a low rate on a personal loan. If you have bad credit you are likely to be turned down for a loan or may be offered an interest rate similar to what you're already paying on a credit card.
• If you use a home equity loan or home equity line of credit (HELOC) to consolidate debt, you could be putting your home at risk. Home equity loans use your house as collateral, so if you default on the loan the lender can foreclose on the property.
• Using a loan for debt may simply be a temporary fix to your money woes. If you have a serious spending problem or don't know how to manage money, you may help from a debt counselor.

Don't rush into taking out a loan to consolidate debt. Maybe putting together a budget and cutting some of your unnecessary expense is a better way to improve your financial situation. If you decide to go ahead and apply for a loan, you can shop for quotes here.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.