The Pros and Cons of Debt Consolidation

Why Consolidation? What Are The Pros and Cons of debt consolidation?

Benefits of Debt Consolidation

For consumers buried by a mountain of credit card debt, a debt consolidation loan is a viable solution. The strategy is simple – take out a new loan and use the proceeds to pay off current debt. There are drawbacks, which will be discussed in the next article in this series; however, debt consolidation offers many valuable advantages.

Of course, one should investigate all available options before agreeing to take out a debt consolidation loan because it is a long term agreement. Other debt relief solutions, including debt settlement, credit counseling, and bankruptcy, may be more appropriate for your situation. When considering debt consolidation, include the following advantages in your assessment.

Debt Consolidation Is the Low-Cost Solution

Unless you have a sufficiently high credit score to qualify for a new unsecured loan, which is not likely if you are currently overwhelmed by debt payments, the debt consolidation loan will have to be secured in order for you to receive a low enough interest rate to justify the consolidation loan. Depending on the nature of the assets pledged, there may not be any fees charged by the bank.

For example, if you were able to give the bank gold coins equal to the value of the loan as collateral, you would likely not have to pay fees. On the other hand, if you pledge real estate as collateral, you may incur fees for the bank to appraise the property and file a lien. Either way, however, your total costs are typically lower for debt consolidation than other relief strategies.

Debt Consolidation Is Fast Relief

Other debt relief strategies can take months or years to execute. For example, debt settlement requires that you save up enough money to fund a lump sum payment to creditors. Bankruptcy can take two to three months to work through the court system, and in the case of a Chapter 13 filing, can take many years before debt is finally paid off. Credit counseling debt management plans often span three to five years to get out of debt. Debt consolidation loans can be secured in a few hours, at minimum, or no more than a month if a real estate appraisal is required.

Debt Consolidation Does Not Affect Your Credit Score

Filing for bankruptcy, settling debts, and even a debt management plan can negatively affect your credit score, probably for years. Debt consolidation may increase your score based on you paying off multiple debts and opening up a new credit line. Of course, if you were behind in payments on your previous debts, your credit score may already be damaged, but the debt consolidation loan most likely should not make it worse.

Using Debt Consolidation Requires No Special Expertise

Unlike bankruptcy and debt settlement, which can be complex and beyond some people’s ability to self-execute, debt consolidation is simple. While you may prefer to work with a debt consolidation professional, if you were able to understand the original credit transactions that the loan is paying off or have ever taken out a home loan, it is likely that you can manage the debt consolidation process yourself if you wish.

Convert High-Interest Debt into a Tax Deduction

Consumer credit card debt is not tax deductible; however, if you use a home equity loan to fund a debt consolidation, the interest paid can be deducted from your taxable income. The effect would be to lower your interest rate by 15 to 25%, depending on your tax bracket.

Use Your IRA to Qualify for Debt Consolidation

Because the IRS allows you 60 days to roll over an IRA or other retirement account, you can use the money to finance a debt consolidation loan when all other funding sources have been denied. You must be organized, because the entire transaction must be completed in the 60-day period and the money re-deposited in a new IRA account, or you will have to pay income taxes plus significant penalties for the early IRA withdrawal. The lender does not have to be told the source of the money. Simply arrange a new loan contingent on you paying off the same amount in higher interest debt. Once you are approved, withdraw the IRA funds, pay the debts, then sign your new loan and re-deposit the money in a new IRA instrument.

The More Obvious Benefits of Debt Consolidation

This article would be remiss if it did not mention the obvious advantages of debt consolidation:

1. By securing the new loan, you should receive a better interest rate than you would with unsecured credit card debt.
2. You may choose to extend the term of the loan to lower your monthly payment. Once your finances are in order or your income grows, you can always add principal to each month’s payment to pay off the loan faster.
3. Paying off your credit cards would open those credit facilities again for your use. It goes without saying that going back into debt is not a good thing. However, if you are judicious with your card usage and disciplined with paying your monthly bills on time and in full, using your credit cards properly can help rebuild your credit rating.

With all the benefits debt consolidation affords, it could be the answer you’re looking for. However, you should always investigate your options and understand the cons of debt consolidation before selecting it as a debt relief solution.

Is debt consolidation the right financial move for you? Find out which financial situations debt consolidation works best for and what options are available.

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