Pros & Cons of Taking a Debt Consolidation Loan

Business | Know More 24 November 2021

Having a debt consolidation loan is like having all your worries in one box. Since, debt consolidation combines multiple streams of debt like, medical bills, personal loan, business loan, high interest credit cards etc., into a single monthly installment. To lower your annual percentage rate, getting a debt consolidation loan can make sense. This makes a consumer have less interest payment and potentially step out of debt in a relatively lesser period of time. However, refinancing debt can have its own upsides and downsides even at lower interest rates.

Pros & Cons of Taking a Debt Consolidation Loan

Understanding Debt Consolidation Loan

Debt consolidation is the process of getting a new loan and using it to pay off old obligations. Debt consolidation loans are usually recommended for people who have a lot of unsecured debt to pay off. These loans could be through a variety of credit cards, personal loans, or private money lenders. Taking a debt consolidation loan can help you save money on your monthly payments by lowering your interest rate. As you might expect, customers who are behind on their payments may find this option appealing, especially because it results in a lower interest rate.

In many cases, to ensure security, customers get secured debt consolidation. A secured debt consolidation loan is one in which the person receiving the funds pledges an asset to the lender as security, such as a car or property. As a result, if you own a home, automobile, or other piece of property, you can take out a secured loan against it. In Many other cases, business loans are also paid off by the mechanism of Business loan debt consolidation.

Pros Of Taking Debt Consolidation Loan

  • Lower Rate Of Interest: The major reason for debt consolidation is to lower the overall amount of EMIs that must be paid. This is accomplished by taking out a loan with a reduced interest rate. This saves you a lot of money that you would have spent on interest otherwise.
  • Easy Management of your Debt and Simplified Finances: Debt consolidation is a tried and true method of reducing financial stress. Making a proactive plan to address your financial issues and combining your existing debt makes your loans much more manageable.
  • Better Credit Score: Getting a debt consolidation loan is a great way to get out of debt. Reduce your credit use ratio, and your credit score will improve. By consolidating several debts, you can lower your credit utilisation score by utilising less of your available credit and, as a result, increase your credit score more rapidly.

Cons Of Taking Debt Consolidation Loan

  • Could Lead to Expansion of Debt: A debt consolidation loan taken without sufficient planning and study can have a detrimental impact on your finances. This can only happen if you are unable to properly handle your new loan. To ensure that everything falls into place, you must prepare for the repayment of your new loan before you take it out.
  • Reduction in Savings: Debt consolidation loans are used to save money that would otherwise be used to pay off debts. However, you should not put your faith in any debt consolidation loan. To maximise your savings, conduct thorough research, analyse all available options, and calculate the overall borrowing cost. Even if you choose a low-interest rate, you will spend the same amount of money over the course of the loan.
  • Prepayment Fees can add up to a Lot of Money: Taking out a debt consolidation loan allows you to pay off your previous debts. This implies you may have to pay your present lenders pre-closure fees. This can detract from your enjoyment because it will be added to the total cost of debt consolidation. As a result, it's critical to check with your current lenders for pre-closure options. If the amount is more, it is preferable to keep the loan with the same lender. But don't make any decisions until you've calculated everything.

The Bottom Line

Debt consolidation is a very helpful mechanism to those dealing with multiple loans. It single handedly pays off all your smaller loans with lower interest rate and at a more comparatively lesser time.

Consolidation of your debt is a crucial financial issue, where a decision has to be taken, while keeping various calculations and assumptions on unforeseen events in mind. It's up to you to weigh the above pros and cons in accordance with your financial situation. Visit Piramal Finance (PCHF) for more information!

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