A Debt Consolidation Loan is taken out from a consolidation company that will cover all your existing debts. It works in a similar way to a mortgage, in that the individual applying must satisfy whoever is giving the money that they can repay it and that they can guarantee this with assets.
There are certainly pros and cons to doing this type of thing. This article will set each of these out, so anyone considering it can make an informed decision.
Here are the pros:
First you don’t have to go from pillar to post trying to keep up with all your creditors. You can simply organize everything into one easy monthly payment.
second, consolidating your creditors in this way also has the advantage of being able to reduce the overall interest rates.
Third, the amount of cash that is being paid on a monthly basis will also be less.
4. You will get a tax interval, meaning a debt consolidation loan works like a mortgage in that you are eligible for tax deduction. With your credit card debt this is not possible.
Now we will look and the cons:
1. This first one is Key and that is that the loan is basically like a second mortgage and you must use assets to be able to secure one. If you do not have these assets you will not be able to secure a loan. Also, the asset that is used as a guarantee can then be taken from you should you default on any payments.
2. The actual level of your debt will increase, because you are taking out a loan for the full amount that you owe and you must pay consolidation fees on top of that.
3. These types of scheme take a significant amount of time to pay off, just like a mortgage would. That means you effectively stay in debt for a long time. Financially and psychologically this can be tough.