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The pros and cons of loan consolidation

If you’re thinking of ways to pool all your debts into one place so you pay things off more efficiently, you may find yourself cycling through a host of debt consolidation options.

You might be considering transferring all your debt onto a low-interest credit card, taking out a debt consolidation loan, applying for a loan based on home equity, or tackling the debt with the help of a debt professional.

The good news is that you have several options to choose from, so taking the time to select a consolidation method that works best for you is essential. If you fail to pay your debts, your credit score will suffer, you can be pursued by debt collection agencies and ultimately face legal and financial hardship.

Today, we’ll go over some debt consolidation options specifically for homeowners, credit cardholders and private lenders while explaining some of the pros and cons associated with each.

For homeowners

If you’ve built up some equity in your home over time and the interest rates are looking better than those found on your other debts, it might make sense to refinance your mortgage loan and borrow the additional funds to pay off more expensive debts elsewhere.

You could also take out a home equity line of credit if you’re looking at a smaller debt sum. Check out the pros and cons of using your home equity to pay off other debts below.

Pros

  • You’ll get a lower interest rate on home equity loans and refinancing than you would from the double-digit interest rates found on most credit cards.
  • You might be able to deduct the interest you’ve paid from your home loan – this is not possible on a credit card.
  • If you shop around carefully, you could save even more on a good deal concerning new closing costs associated with the renegotiated mortgage loan.

Cons

  • Your home becomes collateral once you attach more debt to your property. Losing your home to repossession is a risk you’re taking, especially if you’re irresponsible with debt repayment.
  • If you sign onto a variable rate loan where your interest rate is liable to fluctuate, your loan could actually get more expensive over time, even if the rate starts off low.
  • If you don’t consider your options properly, you could extend the length of time you’re in debt without knowing.

Which one would be more cost-effective? A higher interest rate over a short period of time, or an extended term at a lower rate? Make sure to do your calculations ahead of time.

For credit cardholders

Credit cardholders have a couple tried and true debt consolidation options as well.

First, you can call up your current credit card company and ask for a better interest rate or a waived annual fee. If the customer service rep seems a bit unwilling to grant you some discounts, ask to speak with a higher-up like a supervisor.

Creditors know the competition is tough, and they’d rather keep you on as a customer than see you go with another company.

If you’re a good borrower who pays bills on time, make sure to ask the rep if you can A) get a special rate on any new balances you want to transfer to your card, B) get a lower interest rate on new purchases or C) get your annual fee waived.

Pros

  • All you have to do is call your credit card company
  • You have nothing to lose and potentially a good chunk of money to save

Cons

For a personal or private loan

A personal or private loan can be either extremely beneficial or particularly disastrous, depending on its interest rate. Ideally, you’re going to want to secure a private lender that offers you a better interest rate than those on hand at the bank or credit union.

Pros

  • Both you and your new lender will benefit from the transaction. You’ll get a lower interest rate and they’ll receive that incoming interest from a new customer.
  • There could be tax benefits involved, depending on the structure of the loan. Make sure to talk to a tax professional.

Cons

  • You could ruin a relationship with the lender, or even worse, a member of your family or close friend who is generous enough to loan you the money with minimal interest.
  • The CRA might come knocking on your door if you’ve received a family loan at a below-market rate.
  • This could come with a tax consequence, so again, consult a professional first.