Advantages and Disadvantages of Debt Consolidation – Pros and Cons Reviewed
If a consumer is only making the minimum payments, which do not reduce the principal, a debt consolidation seems to be an answer to a prayer especially when there are multiple creditors, high interest rates, and the tendency to juggle payments drp just to keep the lights and gas on and avoid bankruptcy. A consolidation loan can be the proverbial “balm in Gilead”, but consumers need to be informed; there are two sides to the coin, both positive and negative aspects to this solution. A band-aid will not heal a broken leg, and debt consolidation is not a “quick fix” to poor spending or budgeting habits.
One primary advantage is that proactive debt reorganization can help to raise the credit score over time. A high credit score will ensure a lower interest rate if the consumer is considering purchasing a home in six months, for example, and will result in saving thousands of dollars over the duration of the loan.
A simplistic example is the client doesn’t have to literally throw bills up in the air and pay the ones who land face up now and the remainder later. With a consolidation, there is a single bill, due date, and interest rate. Late payment fees and penalties, which can be significant, are eliminated.
There is a consequential disadvantage for consumers who utilize equity loans from the same mortgage companies. They inadvertently compromise their primary asset, their home. This debt consolidation loan becomes a secured loan and missed payments could result in the loss of the asset. Furthermore, an equity loan can extend the mortgage duration or loan term from ten to twenty-five years depending upon the specifics of the loan.
Another disadvantage is the tendency to overspend. Borrowers must be careful not to create more debt by starting to use their credit cards indiscriminately. Many are lulled into a false sense of security by having only one monthly payment and having money remaining afterwards They make unnecessary discretionary credit purchases, irresponsibly create additional debt, and demonstrate poor budgeting and spending habits that caused the problem initially.
Consumers must make wise, educated, lender choices to p