Pros and Cons of Personal Loan Debt Consolidation

One of the main reasons that people take out personal loans is for debt consolidation. When debts are spread between a number of creditors, all charging different interest rates, consolidating the debt into one monthly payment makes everything more straightforward and easier to deal with. However there are both pros and cons to using personal loans to consolidate debt, and it is important to weigh up the costs and risks before embarking on this route.

Firstly there is no point at all in consolidating current debts unless you recognize that incurring new debts has to stop. A debt consolidation loan can often reduce your total monthly outgoings towards debt, but by doing so it increases the length of the total debt and you may well end up paying far more in interest and fees in the long run. If you consider a loan then work out a figure you can definitely afford to pay back on a monthly basis, and include interest payments and all additional fees which the loan would carry, as well as the amount you need to repay.

If your debt is comprised primarily of credit card debt then a balance transfer card is by far the better option than a loan, and serves the same purpose. It has the advantage of keeping your debt as unsecured debt, and will carry no penalty fees if your circumstances improve and you can pay the debt off quicker than anticipated.

The loans which offer the lower interest rates for debt consolidation are secured personal loans, or home equity loans and second mortgages. The rates will be lower than those offered on unsecured loans, but you will be providing your home as collateral. As you ran up debt in the first place you would need to be absolutely dedicated to clearing the debt on a home equity loan, and certain of your ability to handle your finances. It can be a dangerous move as many second mortgages end up in default, and can lead to foreclosure.

If you do opt for one of these secured loans there will be application fees and processing fees to take into consideration. A second mortgage will entail the additional expense of an appraisal. You should pay great concern to any pre payment or early payment penalties which are applied to the loan, and avoid them at all costs. If you opt for the second mortgage route to raise a loan for debt consolidation you have the further disadvantage of reducing the equity in your home, which is never good fiscal practice.

Unsecured personal loans carry less risk as you are not staking any collateral against the loan. However as they are unsecured they do carry higher interest rates than secured loans. Those without property may be able to obtain an unsecured loan for debt consolidation, but banks will prefer to take a property as security from anyone with a home as an asset.

The only real advantage to consolidating your debt is that it tidies everything up into one manageable payment. If it brings the total cost of your monthly repayments down this can be an advantage, but not if it means you will be paying off the same amount of debt over extra years, thus paying out far more in interest in the long term.