Pros and Cons of Debt Loans

[Nov 20, 2009.]

 

Who doesn't want to get free from the weight of crushing debt? But should people use debt loans to consolidate their bills? Here are some of the pros and cons of using debt loans.

Loans to Consolidate Debt Can Be Helpful

There certainly are pros to using debt loans to pay off bills. Those positives include:

• Being able to consolidate debt into a loan with a lower interest rate


• Having one monthly payment so a borrower has an easier time keeping track of bills


• Consolidating several debts with variable interest in one loan with fixed interest

Paying off debt frees up money that can be used to build up an emergency savings fund, retirement account, or 529 plan for college. Not having so many bills also can decrease a person's stress level and allow him to feel more secure and confident about the future.

Debt Loans Have Some Pitfalls

People thinking of borrowing money to repay debt should be very careful and understand all the potential problems that can occur. Among the negatives are:

• Borrowers increase their debt-to-income ratio when they apply for credit


• Credit scores could decrease if it appears borrowers have too much debt


• People who get debt loans to consolidate bills may run up more debt on old credit lines


• Borrowers may not have enough income to keep up with payments on debt loans


• Interest rates on personal loans can be high

No one should ever rush into a loan of any sort without doing as much research as possible. Borrowers can begin comparing personal loan quotes here to find the right deal. Before signing up with a lender, it's important to get information about all the terms and conditions of a personal loan.

Debt Consolidation Calculator

People considering using a loan to consolidate debts can use a calculator to help make a decision. MSN Money has a calculator that lets potential borrowers put in the amount of debts, type of loan and interest rate they want, and tax bracket.

Borrowers should also remember that they don't need to pay a debt consolidation or debt management company to help set up a payment plan for bills. Most of these companies take a fee that equals a percentage of the debt owed. In some cases, debt management companies require upfront fees. People who decide to get debt loans are better off working out a plan on their own to avoid hundreds or thousands of dollars in fees.

 

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.