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Loan Consolidation. The Pros and Cons

Writer: Kalecia SimmonsKalecia Simmons

Updated: Apr 13, 2023

The benefit of a debt reduction loan (or debt consolidation loan) is it makes it possible to combine all your debts into one and only have one monthly payment. Usually, you can get a lower interest rate and save some money that way. Getting a loan to pay off all past due bills and outstanding debt will get the unfavorable reports off of your credit report, and you will only be responsible for making one payment each month to the lender.


How do you know if a debt consolidation loan is for you? It all depends on your situation. Remember that your debt is not reduced; you have just put them all together and are only making one payment. The size of the payment you are making depends on the interest rate the lending institution gives you and the term or length of the loan.


You will find that a debt reduction loan may not get you out of debt any faster, but if you have the determination and the ability to pay off the debt with only one payment, then the time it takes to pay it off will be much less stressful. Just be careful not to incur any more debt after consolidating your present debts. Cut up those high-interest credit cards and do not use them again. If you do continue to use them, you will only exacerbate the problem. You are trying to make your situation better, not worse.


Also, keep in mind that with a debt consolidation loan from a lending institution, you are trading unsecured debt for secured debt. This means that the debt you incur by using a credit card is debt with no collateral, and the credit card companies need more recourse to get the money owed to them if you cannot make your payments on time.


Secured debt has collateral behind it, and if you fail to make your payments on time, the lending institution who extended the loan to you can and will take the item put up as collateral. If that item happens to be your house, you will most assuredly be looking for a new place to live. So do whatever you can to make the payments on time if you consolidate your debt and get a secured loan from a lending institution.


If your debt is relatively small and you have a long-standing relationship with your lending institution, ask them if they offer an unsecured consolidation loan. Unsecured consolidation loans are given in smaller amounts and could be the answer if your debt is lower and you have no collateral to put up. An unsecured debt reduction loan will have a higher interest rate than a secured loan and is harder to get, but the lower amount borrowed will not take as long to pay off, so it is a decent trade, and there is nothing to lose.


 
 
 

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