Tired of paying notoriously high debt payments every month? Debt consolidation is an excellent way to reduce stress and ensure better financial planning. It is the process of combining several high-interest debts into a single new loan, usually with a single monthly payment.
That said, how beneficial is debt consolidation? Or are there any cons that personal finance gurus are too reluctant to share? Let’s find out.
Pros of Taking Out a Debt Consolidation Loan
The benefits of debt consolidation include:
Low interest rate
The biggest advantage of debt consolidation is the opportunity to qualify for a lower interest rate than you’re currently paying. Your APR will also be reduced when you take out a loan with a new lender.
Even a small reduction in the total APR, such as 25% to 17%, will help you save a substantial amount in interest every month.
Pay off debt faster
Getting out of debt can often feel impossible. But debt consolidation offers a strategic way to pay off debt faster than expected.
Let’s say your monthly payment has changed from $550 to $450 after consolidation. If you don’t need that extra $100, you can continue paying $550 to the debt consolidation loan lender. This will help you become debt-free faster and more effortlessly.
Lenders also offer multiple payment plans for debt consolidation. You can make payments weekly, fortnightly, or monthly, depending on your financial situation.
Improve your credit score
It might not be obvious, but taking a debt consolidation loan can actually improve your credit score. It’s true that applying for a new form of credit, including debt consolidation, requires a hard inquiry, which can lower your credit score by a few points. But once you start making monthly payments on time, the net effect will be positive.
With an improved credit score, you’ll be able to qualify for better loan terms in the future.
Easy budgeting
As hinted earlier, debt consolidation means combining all your previous loans into a single monthly payment. This means that you don’t have to keep track of multiple payments.
Simplified repayments mean less stress and easy budgeting. This can open pathways to financial freedom. A reliable lender will also provide financial assistance through resources.
Straightforward process
Applying for a debt consolidation loan is incredibly straightforward. With most reliable lenders, you receive an indicative decision in just a few minutes. Once the application is approved, your previous funds will be settled as early as 24 hours.
Cons of Debt Consolidation
On the flip side, there can be disadvantages to debt consolidation. This includes:
Additional fees
Debt consolidation can incur additional fees, such as origination fees and balance transfer fees. These additional amounts can range from 1% to 10% of the total loan amount.
Missed payments could make things worse
Missing payments on your consolidated loan is not an option. You could end up in a worse position than you previously were.
Nevertheless, acquiring a debt consolidation loan is an excellent way to pay off high-interest debts on time and without stress.
