When you acquired a large amount of debt, and you’re in the brink of bankruptcy or wishes to have a better hold of your finances, we often turn to debt consolidation as the only way out. Knowing the pros and cons of consolidating your debt is the best way to check if it is worth taking out a brand new loan to pay your financial liabilities.
But before we go over the perks and drawbacks of debt consolidation, do you know what debt consolidation is?
Debt Settlement Vs. Debt Consolidation
Debt settlement is different from debt consolidation. In a nutshell, a debt settlement is when you negotiate with your creditors for ways for you to pay off your debt by giving a lump sum to cover less than the amount of your debt.
Debt Consolidation, on the other hand, is a form of financing that allows you to pay other debts with a secured or unsecured loan.
Good Read: Debt Consolidation: When It Helps, When It Doesn’t
Consolidating Debt With A Secured Loan
Secured loans come in different forms such as the following.
- Car loans with your vehicle as collateral
- Mortgage loans such as taking out a second mortgage, HELOC or a Cash Out Refinance Grand Prairie
- A 401K loan with your retirement fund as collateral
- Life Insurance etc.
Pros of Consolidating Debt With A Secured Loan
Secured loans often have lower interest rates. This means the monthly payments are also more affordable for borrowers. You can even deduct interest payments on your taxes, but make sure to ask your tax advisor before assuming. Secured loans are also easier to qualify since you’re putting an asset as collateral, giving lesser risk to your lender.
Cons of Consolidating Debt With A Secured Loan
You’re putting your assets like your home and car with a secured loan. If you fail to repay your lender, you can lose your property or vehicle, depending on the type of loan you applied for. The term also varies. This means that you will pay lower monthly fees, but the duration of the loan may or may not be longer.
Consolidating Debt With An Unsecured Loan
One may think that unsecured loans such as credit cards are the easiest way to finance debt, but these are also one of the most common causes of indebtedness of a majority of the population. Credit cards may be quite common, but that doesn’t mean just about anyone can qualify for one.
Good Read: Unsecured Loans: Definition and Explanation
Pros of Consolidating Debt With An Unsecured Loan
The best advantage of using Unsecured Loan to consolidate debt is none of your assets will be at risk. You may have bigger rates when it comes to credit card interests, but you can lower your interest and payment after being charged on several CC balances.
Cons of Consolidating Debt With An Unsecured Loan
If you already have a bad credit history or a poor FICO score, you’ll find it hard to qualify for an unsecured loan. Since interest fees tend to be higher than secured loans and the payment you can make are generally lower, it may not make that much of a difference. Plus, transfer fees add up to your expenses which will also add up in the end.