Pros and cons of credit consolidation

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Consumers with too much debt, particularly revolving debt such as a credit card balance, sometimes consider credit consolidation as the answer to their financial woes. As with any major financial decision, though, consumers need to do their research before opting for a debt consolidation loan.

Debt consolidation loans for borrowers with substantial credit card debt may carry a high interest rate. Some homeowners choose a home equity loan instead for consolidating their debt. Before opting for a home equity loan to pay off a credit card balance, use a debt consolidation calculator to compare monthly payments.

Credit consolidation cons

While there are pros and cons to debt consolidation loans, the biggest concern of financial planners is that consumers with significant credit card debt may lack the discipline to pay off their cards and not use them again. Once a debt consolidation loan has been approved and the credit card balances are paid off, those available credit card limits may be too tempting for some individuals.

While the idea of paying one predictable monthly payment on a consolidation loan may be tempting, it is crucial to make sure the loan payment will fit into your budget. A default on a home equity debt consolidation loan can cause a foreclosure.

Credit consolidation pros

For some consumers, consolidating debt can be the best way to get out of debt completely. If the loan is a home equity loan, the interest paid may be tax-deductible.

A debt consolidation loan allows consumers to wrap all their debts into one monthly payment, often at a lower interest rate than credit card companies charge. The important calculation to make is to compare the loan payment with the combined payments on credit card balances. Be sure to calculate how much the loan will cost in terms of fees and how long it will take to pay off the loan in full. Wiping out debt through a credit consolidation may sound simple, but before opting for this seemingly easy way out of debt, it is important to consider the consequences.