Debt consolidation loans are several debts including personal loans, medical bills and credit card balances rolled into one single payment. Consolidating your debts have the opportunity to lower interest rates, monthly payments and pay down your debt faster.
However, if you can’t get a lower interest rate on a debt consolidation loan or afford the monthly payments on one, then it may not be the best option. Weighing on the pros and cons of a debt consolidation loan will ultimately help you decide on whether or not this option is best for you.
Pros of a Debt Consolidation Loan
Payments will be Consolidated
Having debt on multiple credit cards can be hard to keep track of. If you have difficulty managing multiple credit cards then you might forget your payment deadlines by confusing them with one another. This can lead you into a never-ending cycle of debt and the possibility of needed to file to bankruptcy.
A debt consolidation loan can help you pay off your credit card debt and consolidate your payments into one, which may be easier for you to manage.
You’ll Pay It Off Faster
Making minimum payments on credit card bills with a large balance and high-interest rate means you could be spending a great amount of timing paying it off. Debt consolidation loans have terms that range from 2 to 5 years. Opening a debt consolidation loan can help you pay off debt faster and in a timely manner.
It can Improve Your Credit Score
Opening new loans and being responsible when paying them off can help improve your overall credit score. Credit bureaus explained that making monthly payments on-time display debt responsibility. If it’s easier for you to pay off a personal loan instead of paying off multiple credit cards, this does have the opportunity to create a positive impact on your credit score.
Cons of a Debt Consolidation Loan
Consolidating Unsecured Loans and Secured Loans
A secured loan is when you take out a loan and have some collateral to pledge such as a mortgage or car loan. You offer the lender some form of security when you take out a mortgage. The risk becomes high when consolidating secured loans since you could lose your house, car, and even your retirement savings.
An unsecured loan is based entirely on your word to pay back the loan and does not require any property to back the loan. A common example of this type of loan is credit cards which generally have a high-interest rate. Consolidating this type of loan may result in maintaining high-interest rates instead of helping lower your finances.
You’ll Qualify to be in Debt Longer
You might be tempted to think that consolidating your loans means that you’re eradicating your debt. This is never the case you are simply rearranging your debt. You could be lowering your payments by consolidating but this is a consequence of dragging out your loans. Your loan then becomes prolonged and you are paying off your debt for a longer period of time.
Consolidating your loan may not be the best option if you are able to pay more than required every month. The end goal for everyone is to not have a payment, consolidating your debt would slow down that process. First, try working towards living below your means, another loan is not the solution to your debt situation.
Lower Interest Rates Can Fluctuate
Be aware of companies that offer a promotional interest rate for credit card balance transfers. Credit card companies take note that some may like to go over their budget during the holiday season. Try your best to stay away from those credit cards that offer unique low-interest deals before Black Friday or after Christmas.
Typically, these low-interest rates only apply for a certain period of time and will spike up after the short promotional time has ended. A bad credit score may result in not being able to keep up with high-interest rate payments. You can be left with an even greater debt if you’re hooked in by this inconspicuous application of high-interest rates.
Having debt can be tricky and finding the best options for repaying that debt can be confusing. Thoroughly research the best methods in relieving your financial burden whether it may be through sticking with your current situation or moving over to consolidating your finances. Look into all your loan options first, the right debt consolidation loan may be a useful tool in gaining the upper hand over your finances.