It is easy to lose track of the payments and balances of unpaid debts between credit cards and auto loans. Organizing these debts into one loan may well simplify your financial situation.
However, this approach is unlikely to address financial problems. Before applying, you must understand the advantages and drawbacks of getting a debt consolidation loan.
This blog will take a close look at the advantages and disadvantages of this method.
Pros of Debt Consolidation
You may find some helpful advantages regarding debt consolidation. This involves faster and lower interests.
[1] May Reduce Monthly Payment
You might pay less each month than before when you consolidate your debts. This is because your following repayments will be based on a new loan with a possibly longer repayment term.
According to me, This can prove viable from a monthly budgeting perspective, but in the sense of the overall cost of borrowing, you could be charged more even with a lower interest rate. An approximate calculation of monthly payments can be done with the help of a loan consolidation calculator.
[2] Streamlines Finances
Taking a single loan that consolidates multiple outstanding debts helps simplify and reduce the payment and interest rates one has to worry about.
It can also enhance credit score since it minimizes the possibility of creating a credit default or a delayed payment. If you are trying to achieve a debt-free lifestyle, it will give you details on when all the loans will be fully paid up.
[3] Can Improve Credit Score
Getting a new loan might reduce your credit score due to the hard inquiry performed during the application process. But debt consolidation can also help raise your score in several ways.
For instance, when you settle outstanding balances of credit cards, the resulting low credit utilization ratio is reported.
The ideal utilization rate should not exceed 30%; consolidating the debt is a great way to achieve this. You can also increase your score with regular and timely payments.
Cons of Debt Consolidation
A credit card for balance transfers or a debt consolidation loan may be a proper and healful method to repay your debt. However, this strategy also has its drawbacks and dangers. This cannot be missed.
[1] Can Increase Your Current Interest Rate
I think it is possible to benefit from debt consolidation since all you need is a lesser interest rate for your loans. However, if your credit score is not that staggering, chances are you will be given a higher percentage rate at par with the current debts. This may entail paying origination fees with a higher interest amount throughout the loan term.
[2] Often Include Additional Expenses
It is essential to note that taking out a debt consolidation loan might attract some costs like-
- Annual fees
- Balance transfer fees
- Origination fees
- Closing costs
You should only consider what the debt consolidation loan will actually cost you before you enter in to an agreement with your lender.
Over to you
Loan consolidation can be a perfect tool for controlling debt, but this option is not practical for everyone. In my opinion, it is crucial to think through the options and evaluate the potential advantages and disadvantages.
If properly implemented, it has the potential to make your financial life easier and cheaper. But get ready for a potential downside.
Seek professional advice from your financial planner before concluding. It is essential to note that your option ultimately depends on your financial needs and wants.
If you plan to consolidate your loans, do it properly and take your time with the process. I believe an informed decision will set you on the path to financial stability.
