The Pros and Cons of Debt Consolidation

Debt consolidation is on everyone's minds these days. With Americans growing deeper and deeper in debt and jobs becoming increasingly harder to find, many people are looking for answers to their financial problems.

Consolidating your unsecured debt may be the answer to ease the stress of large amounts of debt. As with anything, though, it has its pros and cons.

The Pros:

• Lower monthly payments. When you consolidate debt, you usually lower your monthly payments. This can free up extra cash for life's necessities. It may take the stress out of your monthly budgeting.
• Simplifies your bookkeeping. If you consolidate your debt, you go from paying many different creditors to paying one. This eliminates much of the paperwork that you deal with. It also helps you plan for your monthly expenses more easily.
• May save you money in the long run. If you consolidate your debt at a lower interest rate than you currently enjoy, you could possibly save money overall.

The Cons:

• You could lose your assets. If you borrow money against your property and you can't repay the loan, you could lose that property. This is usually the case with a home equity loan. Make sure you can repay the debt if you have a secured loan.
• Could cost you more in the long run. If you consolidate your debt, you may have a long time to repay the debt. The longer the repayment terms, the more you'll pay in interest. Make sure you calculate the total amount you'll pay in interest before agreeing to a loan. It may not save you money to have lower payments.
• May have additional costs with a new loan. You may actually incur additional debt when you get a consolidation loan. For example, you'll pay closing costs on a home equity loan.

Before you decide on a debt consolidation loan, make sure you weigh the advantages against the disadvantages.

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About the author:

Michael Torrance is a financial consultant with First American Debt Consolidation and Loans, a company specializing in debt consolidation loan alternatives through consumer credit counseling.