Debt Consolidation: Benefits and Limitations

Nov 05

Debt Consolidation: Benefits and Limitations

Most of you who possess multiple loans would be looking for a way to pay them off. Of course, paying back the loan with cash in hand is the easiest solution, but not all of us have thousands of dollars to so do. With your mortgage payments, education loans, auto loans, and credit card debts, it is extremely important that you find a way to pay back all your debts, especially when you possess a lot of different debts simultaneously.

Debt consolidation is one method recommended by most experts when you encounter a situation as mentioned before. Debt consolidation allows you to bring all your debts together as a single loan, and you will have to pay a single monthly payment from now on rather than paying different loan amounts for different loans. This is to make your monthly payments more affordable with a lower monthly payment than before. A debt consolidation loan also offers you a longer repayment period.

Hence, it would be better if you analyze the benefits and limitations associated with a debt consolidation loan before actually applying for bad credit loans. This is because, for some of you debt consolidation might be the right choice to pay off all your debts, but for others there might be a better and suitable debt management solution. This basically depends on the type of debts you possess, your credit score, and your ability to pay back those debts.

Benefits of Debt Consolidation

  • Reduced interest rates: When you obtain a debt consolidation, you will be able to find that the Annual Percentage Rate (APR) is much lower than that of your current loans, especially if you are taking debt consolidation for paying back debts with higher interest rates like payday loans and credit card debts.
  • Simpler finances: When you opt for a debt consolidation loan, you will be left with only one monthly payment to a single creditor, which will make your monthly loan payments much easier to manage as well as affordable. A single loan payment will also enable you to prevent delays or defaults in payments, which would otherwise have an adverse effect on your credit history.
  • Cancellation of your credit cards: Credit cards usually carry higher rates of interest. When you collaborate with a debt consolidation firm, you are less likely to be troubled by your creditors regarding your credit card debts. Also, you will be able to eliminate your credit card debts with a debt consolidation loan.

Limitations of Debt Consolidation

  • Debt consolidation is not the best solution for all borrowers. For instance, if you obtain a debt consolidation loan, you will be required to stop obtaining more no credit check loans, usually like reducing the usage of your credit cards. Most lending firms will ask you to cease using your credit cards once you receive a debt consolidation.
  • As with most secured loans, a debt consolidation would require you to pledge a property as collateral. Although most debt consolidation loans are advertised to be unsecured loans, the fact is that you will not be able to negotiate with the lender about the terms if you do not have any collateral to pledge.