Top 10 Pros and Cons of Debt Consolidation
One of the best ways for people to get out of debt is to consolidate their debt. However, debt consolidation may not be for everyone. Let us take a look at the pros and cons of debt consolidation.
You can repay debt quicker
Consolidating your debt may help you repay your debt sooner. If your credit card debt is large, you can consolidate them into affordable fixed payments every month. Paying off your debt sooner means you will pay a lot less interest. Additionally, the sooner you clear your debt, you can start focusing on other financial goals.
Helps put your finances in order
When you consolidate all of your debt, you no longer have to stress about various due dates each month, because all your payments are consolidated into one payment. The payment amount for each month is the same, so you know how much you have to set aside every month. This ensures you do not miss out on your payments.
Get lesser interest rates
Depending on your credit score and the loan’s term length, you are likely to get a lower rate of interest with a debt consolidation loan. Keep in mind, debt consolidation loans are ideal for borrowers whose credit score is either good or excellent and have lower interest rates than the average credit card.
Helps you maintain a fixed repayment schedule
By consolidating your debt into one easy-to-make single payment, you know exactly how much is due each month, and when your last payment will have to be made.
- It significantly boosts your credit score
While a debt consolidation loan at the beginning may lower your credit score a bit, over time, it will likely improve. By making regular on-time payments, your payment history will have a significant will have a say in boosting your credit score. One of the most important factors in calculating a credit score is one’s payment history.
It does not solve any financial problems by itself
By choosing to consolidate your debt, you are not guaranteed that you may not go into debt again. Debt consolidation merely pays your debt off; it does not eradicate the financial habits that got you into debt in the first place. To help avoid this conundrum, you must set a realistic goal and stick to it. Build an emergency fund that can bail you out in the event of any unforeseen financial expenses, so that you do not have to rely on credit cards.
There may be up-front costs
A few debt consolidation loans come with fees that may include:
- Loan origination fees
- Closing costs
- Annual costs
- Balance transfer fees
You must do your due diligence before considering debt consolidation loans.
You may pay a higher interest rate
Consolidating your debt does not guarantee to reduce the interest rate on your debt, particularly if you have a poor credit score.
Default in payments will set you back further
If you happen to miss out on your monthly loan payments, you will likely end up paying a late payment fee. It can also lower your credit score. Before you take out a debt consolidation loan, ensure you will be able to afford the monthly payments.
For further information on debt consolidation loans, contact the team at 1one Fund Financial today.