Pros and Cons of Debt Consolidation

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People who are burdened with a large amount of debt should focus on trying to reduce their debt. For many people, a large amount of debt will negatively affect their credit rating. Those who can't afford to make monthly payments often have a very bad credit rating. For some, the only hope to eliminate their outstanding debt is to consolidate the existing debt. Some of the pros and cons of debt consolidation are listed below.

PROS of Debt Consolidation

Single Payment- A significant benefit that occurs as a result of debt consolidation is convenience. By combining all of your bills into a single payment you don't have to worry about trying to find all of the different bills. The simplicity that debt consolidation creates often allows people to focus on the making the one single payment.

Reduced Interest Rates- Probably the biggest benefit to having your debt consolidated is the reduced interest rate that you get. Because you are consolidating all of your high interest rate loans into a single low interest rate payment, you can save a significant amount of money on the reduced interest rate. These lower interest rates translate directly into a lower monthly payment that you will have to make. The bottom line is you will save money.

Tax Write Offs- Another great benefit to consolidating a large amount of existing debt is the tax deductions. When you get a consolidation loan, you can actually write off the interest rate payment for you taxes. Not only will your interest rate be lower when you consolidate your debt, but you will also be able to write off the interest you do pay for tax purposes.

CONS of Debt Consolidation

Can Create More Debt- For people who don't address their spending issue at the root of the problem, paying off credit cards could just lead to them spending more money. Using debt consolidation, you essentially combine all of your existing debt and put it into a single lump sum payment. This means that all of your credit cards will be put back on a 0 dollar balance. Many people might be tempted to run up their debt again, without thinking about the consequences.

Could Be More Costly- Some short term debt may have higher interest rates, but because of the short period your pay less overall. When you consolidate your debt you can opt to do it for a longer period of time. This can actually lead to you paying more over time than you would with your short term debt. If you can pay off your debt without consolidating it may be beneficial to you in the long run.

Could lead to Foreclosure- If you own a home and you take out a home equity loan to consolidate your debt, you are using your home as security to the loan. This means that if you do default on the loan, the lenders can foreclose your home as a result. Using your home as security always presents the risk of home foreclosure.

Once you have gone through the list of pros and cons of debt consolidation, you can decide if debt consolidation is right for you. For many people, debt consolidation is the only solution to their debt problem. While for others should create a debt management plan to focus on slowly reducing their debt over time.