An overview of the pros and cons of debt consolidation loans

An overview of the pros and cons of debt consolidation loans

5 February 2010

If you want to consolidate your debts through a loan then there are two options for you - secured and unsecured debt consolidation loans. You should primarily understand the difference between these two loan options. Secured consolidation loans are usually tied to some type of collateral such as your home, car or any other valuable assets. If you fail to make the loan payments, then the creditor has the right to take away the collateral and sell it off to recover their money.

The most familiar types of secured debt consolidation loans are mortgage refinance loans or home equity loans where the consumer borrows against their home equity to pay off their bills. Unsecured consolidation loans are individually secured and no collateral is tied. Therefore, in the event of nonpayment, your account would be sent to a third party for collections. Because of the distinct characteristics of these two types of loans, the pros and cons of each option are different as well.

The pros and cons of debt consolidation loans

Given below are the pros and cons of the two types of consolidation loans:

Pros of secured consolidation loans

• You just need to make a single monthly payment, which simplifies your budget.
• The monthly payment is usually less than what you're paying on your credit cards and other types of debts that you're consolidating
• You can considerably lower your interest rates
• The interest payments on a home equity loan are tax-deductible
• You can stop creditor harassment

Cons of secured consolidation loans

• When you back the loan with a valuable property, you have the risk of losing that property in the event of a payment default
• If you don't change your spending habits, then going for a secured loan to pay off your bills doesn't make any sense. You would again fall into debt if you don't rectify your spending habits. The situation might get worse if there is no more equity left in your home.
• The monthly payment might be unaffordable for many borrowers

Pros of unsecured debt consolidation loans

• You don't need any collateral
• It is easier to manage one loan rather than many loans
• No harassing calls from creditors/collection agencies
• These loans have fixed repayment terms so that you know when you can become debt free
• You can get these loans at competitive rates
• Managing a single creditor reduces your anxieties
• Your monthly payment is reduced significantly
• If you make regular payments for these loans, you can boost your credit score

Cons of unsecured debt consolidation loans

• The interest rates on these loans might not be affordable at all times
• It is more difficult to qualify for these loans than secured loans
• Lenders don't take these loans favorably

Knowing these pros and cons would help you make a better loan decision.

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