Loan Consolidation Pros and Cons

You may have heard of loan consolidation as an option for putting all of your debts into one single loan. This can be a great advantage in some cases, but it does also come with some drawbacks. Here’s everything you need to know to help you choose.

What is debt reconciliation?

Debt reconciliation involves taking all of your debt and covering it with one single loan. This means you only have one monthly payment to make–one with lower interest rates. It is normally recommended for those who are struggling to pay off the minimum on their current bills.

Loan consolidation pros and cons - Man reading book

Dangers of debt consolidation

Though it sounds like a great solution, there are negative aspects to take into account. Firstly, you need to make sure that you are disciplined in making those repayments. You might end up continuing your poor spending habits which have brought you to this point in the first place. Don’t be tempted to make new big purchases or add new debts to your monthly bills.

You could also end up paying more over time. There are a few ways to fall into this trap:

  • Incurring bigger fees than your current debt
  • Seeing a higher interest rate overall
  • Taking a longer-term loan, which may cause interest to add up to a larger amount

Make sure that you do all the sums before you consider loan consolidation.

If you don’t meet your new monthly payments, the penalties could be more than just extra fees. You could end up losing your assets that you have placed up as collateral.

Putting smaller loans, bills, and credit cards under one loan could also affect your credit rating, so think hard about whether this will affect you in the future.

Benefits of debt consolidation

There are plenty of benefits to debt consolidation. Firstly, you will be able to manage your finances easier with just one monthly payment. This means that you will find it easier to budget your monthly expenses, and there is less chance that you will be late in making those payments.

When you have only one creditor on your account, this can also improve your credit record, particularly if you keep the payments up.

Review all your options

Don’t make a hasty decision when it comes to debt consolidation. Weigh up all of the options. It can make it easier to budget and manage monthly payments, but the risks are higher if you fall behind.


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