The Pros and Cons of Debt Consolidation: Consolidating May be a Good Idea
When you consolidate your debt at a lower cost it is possible to use the savings on interest costs to get out of debt faster.
If you go back to the previous example Your monthly installment could increase by $500, to $445. If you don’t require that $55 in other places, and you are looking to clear your the debt as quickly as you can it is possible to continue making monthly installments of $500.
If you apply your savings to the resting balance, you’ll eventually reduce the term of repayment for your loan which can save you more interest as you’ll be making smaller monthly payments.
This method can yield an even greater payoff when you use the use of a account that allows balance transfers. Since you’ll not be paying an interest rate during this promotional time that means the savings you add to your account could be substantial.
There will be only one monthly installment
Instead of having to keep the track of numerous monthly payments or interest charges, consolidating can help you make one payment that has fixed interest rates which will not change throughout the duration of your credit (or for the duration of the promo period for an account that allows balance transfers).
It’s not only about reducing your payments. Consolidation can offer an easy and motivating end of your debt-free journey even in the absence of an arrangement for debt repayment in place.
It is possible to build credit
The process of applying for a new type of credit will require a credit check, which may be a temporary reduction in your credit score of just a few points.
If you do pay your monthly bills punctually and in full the result should be positive, particularly when you consolidate financial debt with credit cards.
The process of paying off your credit card debt decreases the credit utilization ratio, which is among the major factors that determine your score.
Con and cons of debt consolidation
There is a chance that you won’t be eligible for a lower cost
Balance transfer cards are difficult to obtain and usually require good or excellent credit (690 or more in the FICO scale).
Consolidation loans for debt are easier to access and loans are specifically designed for those with bad credit (629 or less in the FICO scale). However, borrowers with the best scores typically have the lowest interest rates.
If the lender cannot offer a lower interest cost than the current rate of your debt generally, debt consolidation isn’t an ideal option. If this is the case, you should consider other strategies to pay off your debts that includes debt snowball or debt avalanche strategies.
It is possible to be in debt with your payments.
If you don’t pay your debt on time for your new loan, you may be in much worse situation than you were when you first started.
In the case of example, if you don’t pay off the balance transfer credit within the zero-interest promotional time then you’ll be liable for the balance at a higher rate that could be greater than the original loan.
If you default on a consolidation loan you may be charged penalties for late payments, and non-payments will be reported to credit bureaus, which could negatively impact you credit scores.
Before consolidating, be sure your new monthly payment is easily into your budget for the entire duration of the repayment term.
The root cause
While consolidation can be a useful tool, it’s not the only solution for ongoing debt. It doesn’t tackle the habits that lead to the debt in the first place.
If you’re in the middle of a lot of debt, you’re better off talking to an experienced credit counselor from an accredited non-profit organization that can assist you in setting up an effective debt management program instead of tackling the issue by yourself.
How to obtain a loan to consolidate debt
A debt consolidation loan requires you to shop for the most appropriate loan one, which is usually the one with the lowest rate of interest. Certain lenders allow you to pre-qualify for rates, without impacting your score on credit.
Three places to search for the loan to consolidate debt:
- Credit unionsCredit institutions typically provide lower rates of interest on loans to consolidate debt for people with fair- or bad-credit customers. You’ll have to be an active part at the credit union prior applying.
- Banking: Banks also offer credit for debt consolidation but customers who are already customers or those with excellent or good credit tend to get accepted.
- Internet lenders These lenders provide debt-consolidation loans for borrowers of all credit ranges. It is important to make sure that the APR is less than the total rates of your existing loans.
After you’ve found the perfect loan and are now ready to apply, collect your personal information , including documents proving your identity, Social Security number and evidence of income that you’ll provide to complete the application. Many applications are available online and require only few minutes to complete.
Based on the lender you select, loans are paid the same day that you’re approved , or within a week.