Pros and Cons of Debt Consolidation Loans

If you’re dealing with multiple streams of consumer debt such as credit card, store accounts, personal loans or even outstanding medical bills, chances are that you may have considered applying for some form of debt consolidation loan at some point.

Obtaining any form of debt consolidation loan can make a lot of sense if it allows you to lower the interest rate that is being charged on the outstanding debts, but there may be some downfalls to obtaining this form of loan as well.

Pros

You Could Obtain Lower Interest Rates

One of the main advantages of debt consolidation loans is that it could allow you to repay what is owing at a lower interest rate, which could save thousands of dollars over the course of a year or two. If you’re fortunate enough to qualify for an interest free balance transfer credit card, you’d pay 0% interest for the entire promotion period – but a 3% to 5% transfer fee may sometimes apply.

Deal with One Monthly Payment

Instead of struggling to keep track of several different payments each month, consolidation loans allow you to combine all of your debts into a single payment with a fixed interest rate that won’t change over the life of the loan.

You Could Improve your Credit Score

Although applying for the consolidation loan will temporarily lower your credit score, making regular monthly payments towards it will help improve it again over time – often to a higher score than you had previously.

Cons

It Won’t Solve Financial Problems Over the Long Term

Opting for a debt consolidation loan doesn’t guarantee that you won’t accrue more consumer debt over time, especially if you have a history of living beyond your means. You will need to compile a strict budget and stick to it in the future if you intend changing your financial behavior for the better.

You Could Pay More Interest over Time

Regardless of whether you obtain a lower interest rate when consolidating your debts or not, you could still end up paying more in interest charges over time – especially if you’ll be repaying over a longer period of time. In some cases, debt consolidation loans can take as long as seven years to pay in full, so you must consider this before signing on the dotted line.

It Can Encourage Increased Spending

Paying off credit cards, store cards and other bills with a consolidation loan often creates an illusion for consumers to the point where they think they’ve got more money than they actually have. As such, you could find yourself in an even deeper hole of debt over time, especially if you aren’t willing to rein in your bad spending habits.

If you would like to learn more about compiling a realistic household budget that will allow you to keep up with expenses and even start saving towards your retirement, you can get started by chatting with one of our experienced financial advisors. Contact us today to set up an appointment.