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Pros and Cons of Debt Consolidation

Posted by : Premraj | Posted on : Tuesday, January 2, 2018


Typically debt consolidation for most of us is understood to be a loan; often time’s people might consider using a balance transfer as a form of balance consolidation as well. The loans that you get might be the personal loans that your bank gives you, a peer-to-peer loan, a home equity loan,etc.

Pros of Debt Consolidation

The loan consolidation id offered by the debt relief companies.

The first and the main purpose of the loan consolidation is to lower your interest rates. So, let’s suppose, you have five credit cards and the average interest rate is 17% and you can get a home equity loan at just 6%. In case of abalance transfer, the interest rate could be even 0% in some cases. So, the benefit is very obvious over here.

It will make things simple for you as now you have only one payment now. You are consolidating all your credit cards into one loan. You have fewer things to worry about,and you can keep good track of all the things you are doing.

The third benefit depends on who you are and how much stretched your financial balance is. The preservation of your credit card and your credit score is very important for your credit consolidation. But, when you do alternative debt consolidation like bankruptcy that hurts your credit score etc. Then debt consolidation is the best option to manage this situation of yours, get a better interest rate and save your credit.

Another benefit is a fixed payoff. Assume you are doing it directly and you have all your credit cards,and your payments are fluctuating continuously. The debt relief companies allow you to give afixed amount at afixed time. So, there is a great deal of benefit in that.

Debt consolidation also offers easy bank transfers. As banks often compete for your business,so it is difficult in another way.

Cons of Debt Consolidation

The cons of the debt consolidation are all dependent on who you are.

You do the balance transfers or the consolidation loans. But, you do not close other accounts,and you start using them,and your payments are again stretching your budget. You again do not have flexibility in your budget because you have one consolidation loan and you are paying for it each month. You are credit card bills on top of it. So, it’s all compounded now. Your earlier efforts to consolidate the loan need to be done again.

The next con that you have to be very careful for is the consolidated balance transfer. It’s not like you get the consolidation balance loan and it stays at that low-interest rate. With time it will grow up to a percentage that will create aproblem for you. You can only afford it if you have a consistent income, you get abonus each year, you get tax repayments,etc.

Another con is that you have to apply for these consolidation loans and balance transfers. Also, you have to get approved for it. If your balance is already stretched to a level that you cannot afford your interest rates that are offered to you, such as, your debt-income ratio, your credit utilization of your accounts that you want to consolidate is so high that you won’t qualify.

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