In spite of the home loan crisis preceding 2008, people continue to take loans for every kind of need, whether they are individuals or businessmen. As long as they can service those multiple loans well, things are fine, but sometimes managing multiple loans becomes a big task. That is when a debt consolidation loan becomes a useful tool.
What Is Debt Consolidation?
A single loan which replaces multiple ongoing loans is called a debt consolidation loan. A debt consolidation loan does exactly what it sounds like. It consolidates several different loans into a single loan that you need to worry about. Sometimes this kind of loan can clear off all existing loans, but if there are too many, then the debt consolidation loan might be enough only to cover part of the existing loans. Normally people contact a lender to take a debt consolidation loan from, but it can be managed by the individual himself as well, by talking to a bank and taking their expert advice about how to consolidate existing loans. Whatever the method of consolidating debt, it does have both pros and cons. Let us look at a few of them.
What Are the Advantages of Debt Consolidation?
If you are getting tired of multiple calls from different creditors regarding their different loans, then a single debt consolidation loan might not signal the end of your debt, but at least there would be only one repayment to worry about. An expert at NationalDebtRelief.com also explained to us that debt consolidation loans could usually be negotiated at lower interest rates, so the repayment amount per month is usually lower than the sum of all the earlier repayments. That would, of course, depend on your history of repayment on the earlier loans. The tenure of the debt consolidation loan would be longer than the longest tenure among the existing loans, and this is an advantage since it gives more time to the debtor to arrange his finances. This last one, however, is also considered to be a disadvantage by some.
What Are the Disadvantages of Debt Consolidation?
Many people mistake a debt consolidation to be a freedom from loans, but that is not the reality. It just rearranges the multiple loans into a single loan. Initially, the credit rating would reduce because your rating score takes into account the elapsed duration of loans, and the new loan would be very new and replace several older loans. The biggest disadvantage is that it only gives a feeling of wellbeing because of the reduced rate of interest, but that is usually achieved by extending the tenure of the loan. Finally, if collateral has provided the debt consolidation loan, then that security stands exposed to risk if you are incapable to repay the loan on time.
Is A Debt Consolidation the Best Solution?
Having both pros and cons, a debt consolidation loan would work best for someone who can show the self-discipline to keep that single loan serviced well and not allow it to go out of hand.
