Debt consolidation brings various debts together into a single balance transfer with the idea of bringing down the interest rate and setting up a reasonable monthly fee that will be paid over a given period. With this, the interest you paid is reduced, and you get out of debt on time.
When you consolidate your debt, you make a single payment every month which is better compared to dealing with a new bill every week. There are some strategies with which one can consolidate debts, and they all come with their ups and downs.
While debt consolidation seems like a good option, it has some drawbacks, which makes it essential to tackle it with knowledge of the pros and cons.
Pros of Debt Consolidation
The best way for people to get out of debt is via debt consolidation. Some of the benefits are discussed:
Pay the debt Sooner
Getting a debt consolidation might put one on a better track to total payoff, especially if the credit card debt is significant. There is no definite timeline for repaying a credit card debt. However, there are monthly fixed payments for a consolidation loan, and you get to know when the debt will end.
A faster repayment plan also means lower overall interest. The quicker you get out of debt, the faster you get to save to achieve your goals, prepare for retirement and save for emergencies.
Your Finances get Simplified
A consolidated debt removes the need to be burdened with a series of due dates every month since the entire debt now becomes one. Besides, the payment amount is fixed, giving you an idea of what to set aside for the payment every month.
Since you have a single payment, it is easy to include it inside your budget, significantly reducing the probability of missing payments.
Reduced Interest rate
On average, a credit card's interest rate is set at 16.03%, while personal loans revolve around 11.88%. Even though many factors affect the interest rate, consolidating your debt gives you a lower interest rate compared to what you will pay on your credit card.
Cons of Debt Consolidation
It is not an Automatic get-out-of-debt Card.
Consolidating debt is not a license that you will be forever out of debt. Once you are out of debt, but you are known to always live beyond your means, there is a high probability that you will also enter debt again.
One way around this is to have a realistic budget and work with it. Also, make sure to have emergency funds to take care of unplanned financial demands. This removes your dependence on credit cards.
In considering debt consolidation, be sure you are aware of the cause of the debt. With this, try to adjust your budget and the way you spend. It can help prevent a recurrence of such a situation.
You Might have a couple of Upfront Costs.
There are debt consolidation loans that have fees that might include:
Fees for loan origination
Fees for a balance transfer
Annual fees and
Closing costs
With this, be sure to be aware of all associated fees if you are considering debt consolidation. There could be fees for early repayments and late payments. As a result, make sure to be diligent with your research before making a choice.
The rate Might be Higher.
Compared to what you pay at the moment; the debt consolidation loan might have a higher rate. There are many reasons for this, which include your credit score.
The interest rate consumers get when consolidating debt is a factor of their credit rating. As a result, a challenged consumer will typically get a higher rate.
Other reasons for the high amount as interest include the loan term and amount. If you extend the duration of your loans, you might pay less every month. In the long run, however, you will pay more.
As a result, be sure to consider your immediate needs and compare them with your long-term goals when considering debt consolidation. It can help you come up with the perfect solution.
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