Today’s guest post was written by Bethaine Parker.
You can read more from Bethaine, here: www.debtconsolidationus.org/blog
Good or evil?
How much is taking out a debt consolidation loan worth to you?
When it comes to getting out of debt there are multiple solutions available, including DIY methods such as the Snowball/Avalanche and using balance transfers.
They all have their benefits, but they also have their limitations, such as negatively impacting your credit and forcing you to make sacrifices. It’s important understand the pros and cons and to choose an option that works for you and according to your affordability and other financial conditions.
There are a lot of misconceptions around choosing the best debt relief option.
If you can’t afford to pay off your high-interest debts every month, and you don’t want to damage your credit by settling them, debt consolidation may be the best solution for you.
But can taking out a debt consolidation loan make you debt free? Is it beneficial or harmful for you?
Let us analyze the pros and cons of taking out a debt consolidation loan and clear our minds!
#Pros of taking out a debt consolidation loan
The main advantage of a debt consolidation loan is that you may pay off all the current debts by taking this loan. Your high-interest, unsecured debts such as credit cards you’ve been struggling to pay, your household utility bills, high-interest payday loans and medical bills, will all be paid fully. You may even repay your bank overdrafts.
A debt consolidation loan eases up the hassle of paying multiple unsecured debt payments each month, along with the ones which are past due.
You only have one monthly payment to worry about…the debt consolidation loan. Managing only one payment per month is way easier than coping with multiple payments!
Most low-interest personal loans are taken out as debt consolidation loans. So, this loan is cheaper than any of your existing credit card or payday loan interest rates. Consolidating at a lower interest rate gives you great savings in the long run.
Taking out a debt consolidation loan may help you to pay off debts faster. Credit cards don’t have a set timeline for completely paying off a balance. You have to pay a minimum balance every month and the interest grows every month. But, if you consolidate your debts with a loan, you’ll be working with fixed payments every month and repaying your debt faster.
The quicker you can pay off your debts, the sooner you can start investing more money towards fulfilling other life goals, such as an emergency or retirement fund.
If you have bad credit, you might still apply for a debt consolidation loan. But having a good credit and payment history will help you to get a better interest rate while you negotiate with the lender.
While taking out a debt consolidation loan you’ll face a hard credit inquiry. So, initially, it may lower your credit score a bit. But, a debt consolidation loan will improve your score over time, if you make on-time payments. Making on-time payments would raise your score because good payment history can influence credit score by 35%.
After paying off your old credit cards, if you still keep the accounts open, you’ll reduce your overall credit utilization. A low credit utilization ratio and a stronger payment history will help your credit score to rise again.
So, it can be said that consolidating debts through a loan can ultimately improve your credit score.
#Cons of taking out a debt consolidation loan
Apart from those immense benefits, taking out a debt consolidation loan may have some cons also. Lenders may approve unsecured debt consolidation loans and offer you cheap interest rates only if you fulfill some strict criteria. To qualify for a cheap consolidation loan, you may need a solid income, a high net worth, assets equally valued to your debts, or a co-signer (with a high net worth and a very strong credit score) if you have bad credit.
Few lenders may ask you for a security or collateral before approving your loan application. In this case, you may have to provide a good amount of assets as collateral.
Interest rates of personal unsecured loans are usually higher than a home equity loan. But you need to remember that taking out a cash-out-refinancing loan instead of a personal loan may prove devastating. If you somehow can't pay off the personal loan, your finances will be affected and your debts will increase. But if you can’t pay off a cash-out-refinance loan, you may lose your home entirely.
If you don’t have a steady income then taking out a consolidation loan will also become a financial issue for you. If you can’t make the monthly payment on time, the interest will pile up and increase your total debt gradually. Apart from that it will also affect your credit score and be added to the credit report as a bad item.
Some debt consolidation loans come with fees. Costs such as loan origination fees, balance transfer fees, closing costs, and annual fees can be charged to you. So, before applying for a debt consolidation loan, know about all fees, including late payments and early repayment penalties. If you don’t want to pay that cost, and only want to pay what you can afford, do not opt for such loans.
After considering the pros and cons of debt consolidation loans, it can be said that debt consolidation through taking out a loan will be a wise choice, for those who want to get rid of multiple monthly payments, as well as want to reduce overall interest rate. But you also have to remember that a debt consolidation loan might not work for you if you don’t follow a realistic household budget. It’s important to make your bill payments, loan payments and annual expenses when you have a debt consolidation loan.