Debt consolidation loans are multiple debts including medical bills, personal loans, and credit card balances bundled into one single payment. Consolidating your debts presents the chance to expedite lowering interest rates, monthly payments and paying down your debt faster. However, if you can’t get a lower interest rate on a debt consolidation loan or have the funds for the monthly payments, then it may not be the best choice. Weighing the pros and cons of a debt consolidation loan will eventually help you decide on whether this option is best for you.
Cons of a Debt Consolidation Loan
Consolidating Secured Loans and Unsecured Loans
A secured loan is when you pull out a loan and have some collateral to pledge such as a mortgage or car loan. You proposition the lender some form of security when you take out a mortgage. The risk escalates higher when consolidating secured loans since you could lose your house, car, and even your retirement savings. An unsecured loan is based completely on your word to pay back the loan and does not require any assets to back the loan. A common example of this type of loan arecredit cards which normally have a high-interest rate. Consolidating this type of loan may result in upholding high-interest rates instead of serving to lower your finances.
You’ll be in Debt Longer
You might be curious to think that consolidating your loans means that you’re eliminating your debt. This is at no time the case you are merely rearranging your debt. You could be lowering your payments by consolidating but this is a result of dragging out your loans. Your loan then becomes extended and you are paying off your debt for a longer period. Consolidating your loan may not be the best decision if you are able to pay more than mandatory every month. The end goal for every person is to not have a payment, consolidating your debt would delay that progression. First, try working towards living within your means, another loan is not the solution to lower your debt.
Lower Interest Rates Can Change Over Time
Be conscious of companies that suggest a promotional interest rate for credit card balance transfers. Credit card companies pay attention to small facts such as people most likely going over their budget during the holiday season. Try your best to stay away from those credit cards that offer exclusive low-interest deals before Black Friday or after Christmas. Typically, these low-interest rates only apply for a certain period 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.
Pros of a Debt Consolidation Loan
Your Payments Will Be in One Place
Having debt on multiple credit cards can be tough to keep track of. If you have difficulty managing multiple credit cards, then you might overlook your payment deadlines by puzzling them with one another. This can lead you into a never-ending cycle of debt and the likelihood of needing to file for 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.
Your Credit Score Will Benefit
Opening new loans and being accountable when paying them off can help recover your overall credit score. Credit bureaus clarified that making monthly payments on-time presents 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 produce a helpful impact on your credit score.
You Could Pay It Off Faster
Making minimum payments on credit card bills with a hefty balance and high-interest rate means you could be spending an excessive amount of time paying it off. Debt consolidation loans have terms that array from 2 to 5 years. Opening a debt consolidation loan can support your efforts in paying off debt faster and in a timely manner.
Having debt can be complicated and finding the best options for repaying that debt can be perplexing. Carefully research the best methods in avoiding bad credit whether it may be through sticking with your present situation or transitioning over to consolidating your finances. Begin with looking into every loan option, the right debt consolidation loan may be a useful resource in leveraging the upper hand over your finances.