Advantages & Disadvantages of a Debt Consolidation Loan
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If you have a number of outstanding loans and credit card dues, the only thing that can save you from bankruptcy is a debt consolidation loan. Bankruptcy stays on your credit score for several years and you will find it difficult to obtain a fresh loan during all these years. Therefore, it is a wise thing to avoid bankruptcy.
A debt consolidation loan is a new loan that you take out to repay your existing loans. A debt consolidation loan is usually a secured loan whereas credit card dues and other personal loans are usually unsecured loans. Therefore, it is advisable to replace your high rate loans by a low rate debt consolidation loan.
There are several advantages of debt consolidation loans:
· It is easy to manage a single loan since you have to repay the loan to only one lender.
· The rate of interest on a debt consolidation loan is lower than that on unsecured personal loans and credit card dues.
· Since the rate of interest on a debt consolidation loan is low, the amount of monthly installments is also small.
· You can get tax benefits on the interest thatyou pay on a debt consolidation loan.
Besides the above mentioned advantages, debt consolidation loans also have a few disadvantages:
· The loan period of a debt consolidation loan is longer than the loan periods of unsecured loans and therefore, you end up paying a larger amount of interest.
· Debt consolidation loans are usually secured against property. If you default in the repayment of a debt consolidation loan, your property may be repossessed by the lender.
There are different types of debt consolidation loans. If you are a homeowner, you can use your house to avail a debt consolidation loan. Since such a loan is a secured loan, it carries a low rate of interest. If your house is already mortgaged, you can get a home equity loan to consolidate your debt. Home equity is the value of your house minus the unpaid mortgage balance. You can also obtain a personal debt consolidation loan. However, the high rate of interest on an unsecured personal loan may defeat the very purpose of debt consolidation.
By Vipul J
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