What are the Pros & Cons of a Debt Consolidation Loan?
Being in debt can be overwhelming, especially if you owe different lenders. The best solution to managing such debts depends on your unique situation. For instance, you can begin by paying off the high-interest debts first, negotiating rates with the other lenders, and sticking to a payment schedule. Others choose to consolidate their debts. We have covered more on this below. Call us today to learn more.
What is Debt Consolidation?
Debt consolidation is the process where an individual takes out a new loan to settle other loans or debts. This kind of loan combines several smaller loans into one larger loan having favorable terms and conditions, such as reduced interest rates and monthly repayments. Most people use this financing option to settle consumer debts, e.g., credit cards, student loans, and other liabilities. Banks, credit card companies, and credit unions offer debt consolidation loans.
Benefits of Debt Consolidation Loans
Lower Interest Rates
Most financing institutions offer debt consolidation loans with reduced rates. For instance, loans meant for debt consolidation have an estimated average rate of 10%, which is cheaper than credit card loan rates, ranging from 18-20%.
Allows You to Repay Your Debts Faster
When borrowing a debt consolidation loan, you are working with a plan that allows you to track your progress and better manage your income and expenses. Such a schedule and high-level commitment allow you to pay off your debt faster.
It Helps Improve Your Credit Score
If you use the debt consolidation loan properly, it will help build your credit score. The on-time repayments and low credit utilization ratio are among the key indicators lenders use to score your creditworthiness.
Saves You Money
Paying your loans at considerably lower interest rates can save you money. Alternatively, it can help you pay the loan for a shorter period.
Disadvantages of Debt Consolidation Loans
Debt consolidation loans may be accompanied by additional fees such as the closing cost, origination fees, annual fees, and balance transfer fees. Therefore, checking the actual cost of consolidated debt before making a move is advisable.
It Could Raise Your Rates
Debt consolidation works if you qualify for lower rates. If your credit score does not allow you to qualify for competitive rates, you may end up paying higher interest rates than your current debts.
Risk of Missing Payments
The risk of defaulting causes greater damage to your credit score, plus you could end up paying additional fees. To refrain from this, you should examine your budget to ensure you can easily make the payments on time. If you think you'll miss the payment, you should communicate with the lender earlier to avoid potential penalties.
It Requires Strategy and Discipline to Yield Desired Results
Debt consolidation without a plan is more likely to fail. Taking a loan to pay another loan on its own isn't a great solution to the debt problem. If you want to get rid of debts, you should reduce spending and start saving so that you are always ready for sudden emergencies or expenses.
Seek Help Today
Debt consolidation isn't as scary as it sounds if you have a strategy. The first step is to secure a debt consolidation loan. Contact us today, and we'd love to discuss your debt management goals and how you can minimize the debt burden.