Recognizing the Advantages and Disadvantages of a Debt Consolation Loan

A debt consolation loan is not a magic cure if the issues that brought you towards the necessity of taking one are not adequately dealt with. Simply put, if you are in debt because of reckless spending practices, a debt consolation loan is not the cure-all solution. It can be place you in a worst situation than before. Thus, it is better to stop and rethink about taking a debt consolation loan lest you simply end multiplying rather than curing your problems.

You find yourself into a situation where your resources are just not holding up sufficient funds. Slowly you are pulled into an abyss of unpaid debts. Before it can be too late, you are now considering various options including taking a debt consolation loan. But is it the right solution? Here are a few facts that can help you understand the underlying issues behind a debt consolation loan.

What really happens if you take a debt consolation loan is something more than you bargained for. You will only be adding to the long list of payments that you need to take care of. At the end of the day, a debt consolation loan will not help you at all.

The next issue that you have to contend with is the idea of having the debt consolation loan as a short-term solution. You might be lulled to thinking that your problem is over and end up with a false sense of security. It has been recognized that people do spend a little bit more after having secured a debt consolidation loan. This is due to the fact that they have been relieved of, though temporarily, dealing with a debt problem.

Finally, the gravest problem about a debt consolidation loan is the amount of money that one ends up borrowing. It can be more than what you actually owed. So, aside from being able to pay for your unpaid debts, you end up also buying unnecessary luxuries like a new entertainment set, a trip to the Bahamas, etc. Before you know it, you have spent on things that you do not really need and end up owing much more than your original loan.

Despite all these disadvantages, debt consolidation loans can still be resorted to. If you are responsibly spending your money within the last six months to a year and you have also paid most of your outstanding loans on time, you can consider getting one. The loan can even provide you with more liquidity as well as create an emergency fund.

There are various types of debt consolidation loans that you can consider.

One is from peer to peer lending. This is the most viable solution as there are Lending Clubs that are now available. At these clubs, you can borrow money at a lower rate than any bank. You can even get as much as £25,000 personal loan with an interest rate of 7.88% when you have an acceptable credit score.

The second type is a loan from credit unions. These loans are more easily accessed with reduced interest rates as compared to other sources.

The third one is a pledged collateral. You can borrow from banks using in-bank deposits like CD’s as collateral. Usually the borrower may not provide the collateral but it can be from a family member. Hence, there is more trust needed in this case as the one providing the collateral will have to assess the situation more carefully.

The fourth type of debt consolation loan is cash value life insurance. The money that can be borrowed on this kind of insurance is usually at a better rate. If you do not have this insurance, you can try asking your parents.

Finally, the fifth kind is borrowing from family. This needs to be approached more carefully. Consideration should be given to a family member who loaned the money to you. You really have to pay back the loaned amount.

There are also other options that are still available but must be avoided without fail. These include loans from retirement account, payday anticipation loans, credit card loans, and home equity loans.

In sum, debt consolidation loan should be used as a last resort; and only in cases where you can prove to be fully responsible in your spending.