Pros and Cons of Using a Debt Consolidation Service

What Lies in Your Debt?

Debt consolidation services can be a big help to getting out of debt and staying out of debt. Secured consolidation loans are secured with collateral, which means it’s less risk for the lender. Unsecured consolidation loans use none of your collateral, but may charge a higher APR.

Either way, you’ll benefit from consolidating all your loans into one monthly payment with one lower APR. Secured loans will provide the lowest APR and they’re the easier of the two to obtain.

If you decide to use home equity to secure a consolidation loan, you’ll also have the advantage of being able to deduct the interest on your tax return. Unless you own a home, car or other assets such as land or a boat, you can’t apply for a secured consolidation loan.

The amount of the collateral you’re securing must be at least enough to cover the loan amount. Keep in mind that with a secured loan, the lender can seize your asset if you are found in default of the loan.

Unsecured consolidation loans don’t require collateral to secure the loan, so you might end up with a higher APR. It’s still a good way to go because you’re likely to have a lower APR than most of the debts you’re consolidating.

It’s not a good idea to get an unsecured loan through a credit card. These offers involve combining all your current credit card balances into one, new credit card which has a lower APR. This may sound like a good idea, but it’s not the best route to take for several reasons.

One reason is that the new, low APR is only temporary. After a few months, the rate changes to a higher rate. Most credit card companies who offer consolidation of loans also tack on a fee (can range from $50 to $100) for each balance you transfer from other credit cards. This can add up in a hurry.

You may also incur a lower credit score when you open a new credit card account – especially if you max it out right away. Consolidating your debts by credit card may also mean that you stay in debt for a long period of time, since most companies don’t set a certain time limit for you to pay it off.

Check with your bank and several others before applying for a consolidation loan to see which can offer the best rate. If you belong to a credit union, you may get the lowest APR rate possible. Credit unions are non-profit, but restrictions for membership are often stringent.

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