Debt consolidation is an option to reduce your monthly payments and simplify your financial life. By combining multiple debts into one payment, you can save money on interest and make it easier to stay on top of your bills.
There are many benefits to consolidating your debt, including a lower annual percentage rate. However, refinancing also has its drawbacks – even at a lower rate. It’s important to weigh the pros and cons of debt consolidation before making a decision.
Pros and Cons of Debt Consolidation Summary
|You could receive a lower rate than what you are currently paying||You may not qualify for a low rate|
|You will have only one monthly payment||Missed payments could worsen your situation|
|You could get out of debt faster||It doesn’t address the root issues that caused the debt|
|You could improve your credit score|
Pros of debt consolidation
You could receive a lower rate
Debt consolidation can save you money by reducing your interest rate and consolidating your monthly payments. For example, if you have $9,000 in total debt with a combined APR of 25% and a combined monthly payment of $500, you would save $2,500 in interest over two years by consolidating your debt.
However, if you were to take out a debt consolidation loan with a 17% APR and a two-year repayment term, your new monthly payment would be $445.
A balance transfer card could help you save money on interest and get your debt under control. With a balance transfer card, you can enjoy a promotional period with zero interest.
You could get out of debt faster
If you consolidate your debt at a lower interest rate, you can use the money you save on interest to pay off your debt even faster.
If you’re looking to get out of debt as soon as possible, you may want to consider increasing your monthly payments. For example, if you’re currently paying $500 per month, upping your payment to $555 could help you become debt-free more quickly. Of course, make sure that you can afford the higher payments before making this decision.
Additionally, by using your savings to pay down your remaining balance, you may be able to shorten your loan’s repayment term and save money on interest. Fewer monthly payments could mean paying less interest overall.
You’ll have just one monthly payment
If you’re struggling to keep track of multiple monthly payments and interest rates, consolidating your debt could be a good solution. This would involve combining all your debts into one payment with a fixed interest rate that wouldn’t change over the life of the loan. This could help make things simpler and more manageable for you.
Debt consolidation is not only about simplifying your monthly repayments. It can also provide you with a clear and attainable goal of becoming debt-free.
You could build your credit
Applying for a new form of credit can be a difficult process, but if you make your payments on time and in full, it can have a positive effect on your credit score. If you are consolidating credit card debt, this can be especially beneficial.
Your credit utilization ratio—the amount of credit you’re using compared to your credit limit—is one of the biggest factors that determine your score. So, by lowering your balances, you can give your score a boost.
Cons of debt consolidation
You may not qualify for a low rate
Credit cards that offer a 0% introductory APR on transfers of balances from other credit cards can be difficult to qualify for and usually require excellent credit (a FICO score of 690 or higher).
Debt consolidation may not be the best option if your lender cannot offer you a lower interest rate than what you are currently paying on your debts. In this case, you may want to consider another debt payoff strategy, such as the debt avalanche or debt snowball method.
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You could fall behind on payments
Missing payments on your new debt can end up putting you in a worse position than before. It’s important to stay on top of your payments to avoid any negative consequences.
If you don’t pay off your balance transfer card within the zero-interest promotional period, you’ll have to pay a higher APR. This could be higher than the original debt.
Falling behind on a consolidation loan can result in late fees and damage to your credit score since most lenders will report to the main credit bureaus.
When considering consolidation, make sure your new monthly payment will fit comfortably into your budget for the entire repayment period. This will help you avoid any financial difficulties down the road.
You haven’t addressed the root problems
Debt consolidation can be a helpful tool, but it’s not a magic bullet for getting rid of debt. It also doesn’t address the root causes of why you got into debt in the first place.
When it comes to overspending, consolidation can actually be quite a risky choice. By taking out a loan to pay off credit cards, for example, you’re essentially putting yourself in even more debt. You might be tempted to use the credit cards again before the new debt is paid off, which would only make the situation worse.
Debt can be a difficult thing to manage on your own. Sometimes it is best to consult with a credit counselor at a reputable nonprofit. They can help set up a debt management plan that better suits your needs.
How to get a debt consolidation loan
Now that we reviewed the pros and cons of debt consolidation, there are a few things to consider before taking out a debt consolidation loan, like shopping around for the best interest rate and terms. Some lenders will let you pre-qualify so you can get an idea of what kind of rates you’re looking at, without affecting your credit score.
There are three places to keep in mind when looking for a debt consolidation loan:
- Credit unions: If you’re looking for a lower interest rate on a debt consolidation loan, a local credit union may be a good option. These financial institutions are typically more willing to work with borrowers who have less-than-perfect credit scores.
- Banks: Banks offer loans for debt consolidation, and existing customers or borrowers with good credit are more likely to be approved. However, anyone can apply for a loan, and there are many options available.
- Online lenders: There are many benefits to consolidating your debt with an online lender. You can get a consolidation loan regardless of your credit score, and the APR will likely be lower than the interest rate on your current debts. This can help you save money and get out of debt more quickly.
Before you apply for a loan, it is important to research different options and find the one that best suits your needs. To begin the application process, you will need to gather some personal information, such as proof of identity and income. Most applications can be completed online in just a few minutes.
Different lenders offer different time frames for funding your loan. Some may provide same-day approval and funding, while others may take up to a week.
Best2020Reviews has reviewed many online lenders to find the best options for debt consolidation loans, taking into consideration the pros and cons of debt consolidation and how each one of these companies operates. Our top picks have low APRs, flexible repayment terms, and features that can help you get out of debt faster.