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Advantages and Disadvantages of Debt Consolidation Loans

Whether you are at the edge of bankruptcy or just looking to manage your personal or business finances in the best possible way, debt consolidation loans may be the answer that you are seeking.

What Is Debt Consolidation?

Debt consolidation is the practice of using the proceeds of a single loan to pay off, multiple, smaller, outstanding loans. As such, you will just be left with a single monthly payment. The theory behind consolidation is that a single payment will be easier to manage.

You will lower your interest as well as the monthly payment. However, it is important to note that debt consolidation and debt settlement are two different things. When consolidating, you will use a balance transfer to pay smaller debts in full without negatively impacting your credit score.

What Is A Debt Consolidation Loan?

This is the loan that you receive to pay off your other smaller loans.

In this article, we will discuss the advantages and disadvantages of debt consolidation loans.

Let’s get started!

The Advantages

Debt consolidation loans come with the following advantages:

 

  • Cash flow improvement

 

Smaller debt payments will not have a high demand for your cash flow. As such, all your funds will not be used for debt payment. Instead, the extra money can be deployed for other projects. This will alleviate any financial stress that you may have.

 

  • Focus on growth

 

When struggling to pay off a lot of debt, then you may not necessarily focus on your personal growth or the growth of your business as much as you will focus on staying afloat. But with debt consolidation loans, you will automatically have control over your resources. This way, you will know that the most important financial aspects of your personal life or business have been settled. This will give you the opportunity to focus on finding clients and expanding your business or investing in yourself.

 

  • A good handle on payment terms

 

Debt consolidation loans are a good option when you are dealing with existing loans. When the demands that come with these loans become untenable, then consolidation will allow you as an individual or business owner to lower your monthly payment so that your debt can become more manageable. Apart from lowering the interest level, the loan term of your debt can be extended. This is one of the main reasons why many people go for balance transfer and debt consolidation.

 

  • Available to small businesses

 

There is nothing more challenging for a small business than funding. A majority of the time, because these businesses have not reported any profits or returns, they may not qualify for business loans. But the good news is that debt consolidation loans are available for small businesses. Companies that qualify require the following:

  1. A three-year or more existence
  2. At least $50,000 in financing
  3. An up-to-date tax plan or payment plan

 

  • Little risk of credit damage

 

The reality is that if you acquire a loan and do not attempt to make payments or fail to pay altogether, then you will cause significant damage to your credit score. But with a debt consolidation loan, things are a little different. The loan in itself presents a low inherent risk of damage to your credit score.

The Disadvantages

Granted, consolidation loans come with a lot of merits. But it is equally important to be well-informed about their demerits. As you consider a debt consolidation loan, it is important to consider address these concerns:

 

  • Pre-payment penalties

 

There are debt consolidation loans that come with pre-payment penalties. As such, these penalties defeat the purpose of consolidation. Before signing up for this type of loan, it is best to crunch the numbers and identify the net cost, just in case you choose to make an early payoff.

 

  • Not easy for subprime borrowers to find affordable loans

 

It is challenging to find debt consolidation loans without collateral. Borrowers who are credit-impaired hardly qualify for these types of loans. In other words, the best way to qualify for these loans is to put up valuable collateral.

The Bottom Line

Let’s face it, paying multiple loans is a hassle that we all try to avoid. But with debt consolidation loans, you can bring all your loans together and enjoy a great deal of financial and emotional relief. Even so, do not let your guard down after you pay off all your smaller loans. Remember, you still have to pay off your debt consolidation loan. Do not hesitate to seek advice from a financial management firm as this will leave you more informed and confident about your decision.