Debt Consolidation Loans: Risks and Advantages

Thinking about getting a debt consolidation loan? With the recent economic recession leaving many in mountains of debt, getting a debt consolidation loan has become a popular answer to eliminating that debt. You may see advertisements for debt consolidation loans popping up in your e-mail like flies or see advertisements on television, and it may seem tempting to get one. Well, before signing on the dotted line, it is best to know the advantages and disadvantages of obtaining a debt consolidation loan.
So what is a debt consolidation loan? A debt consolidation loan is a loan that is provided by a lending institution that pays off your debt and then allows you to make one monthly payment with a lower interest rate as opposed to numerous monthly payments with varying interest rates. So, if you have several credit cards with interest rates between 11% and 22%, replacing those with one monthly payment with 12% interest will save time and money, not to mention relieving a great many headaches. Sounds tempting right? I mean, if a debt consolidation loan makes everything this simple, where do you sign up? While it sounds tempting, there is, of course, a flip-side to the coin; as the saying goes, always read the fine print.
So what are the advantages and disadvantages of a debt consolidation loan? As mentioned earlier, a debt consolidation loan can greatly reduce your debt by combining all of your payments into one, low interest payment leaving you with more money at the end of the month, and that is something we can definitely benefit from. However, this is not always the case. Depending on the structure of the loan, you may end up paying more interest on the loan than you were with the various payments; it may also take more time to pay off the loan than it would to pay off the debts as they are.
Another thing to consider when applying for a debt consolidation loan is your credit score. If your credit score is low you will be considered a greater credit risk, and your interest rate will be priced accordingly. Also, getting the loan can affect your credit score by lowering it. However, this can work to your advantage: if you stay on top of the payments and pay it off quickly, this will boost your credit score substantially. How many times have you been penalized by your credit card company for missing a payment because you have so many to manage? Seeing as a debt consolidation loan reduces the number of your monthly payments, it will make it easier on you to manage them, and reduce your chances of being late on a payment. This alone can greatly benefit your credit score. However, a late payment or two can affect your credit score and your ability to receive a loan further down the line.
Also, you need to be aware that debt consolidation loans demand a higher level of commitment and fiscal responsibility than your average loan. Seeing as the institutions who write these loans want to know that they are protected by assuming the risk, debt consolidation loans are usually secured loans with collateral such as your home or other valuable asset, though this usually means that the lending institution has recourse in the event of default and means that the institutions are able to offer such loans at a low interest rate. While it is possible to get an unsecured debt consolidation loan, lenders of this sort will be much more selective and a bad credit score and immediately bar you from being eligible.
A debt consolidation loan, like any other loan of its type, has its benefits and detriments. When looking into getting a debt consolidation loan, it is best to see how it stacks up against any alternatives and then pick the deal which best suits your financial capacities and needs.