Debt consolidation involves combining multiple debts into a single loan to make it easier to pay them off. It can be tricky to use a specialty debt consolidation loan to clear off your debt as there are a lot of scammers around. The easiest way to consolidate a loan is by using a personal loan. The following are the 8 advantages and disadvantages of debt consolidation loans.
- Avoid Missing a Payment
Consolidating multiple debts with a personal loan will help you to cope with your finances. Now, you only have to make one payment every month. You can avoid missing a payment and getting charged a late payment fee. When you only have one payment to make, you find that it is easy for you to keep up with the payment and it thus improves your credit score. What is more important is that you are on your way to a debt-free lifestyle.
- Ability to Make More Monthly Payment
Debt consolidation lowers the interest rate to make it easier for you to pay off your debt. Since the interest rate is lower, you can consider paying more money for the loan. Through debt consolidation, you can enjoy an extended loan term. With a longer loan term, you will make a lower monthly payment. While it is more advantageous to make low monthly payments, you need to keep in mind that you will be paying more interest fees over time.
- Improve Your Credit Score
Debt consolidation loans can improve your credit score in several ways. You are reducing the credit utilization rate when you promptly make the monthly payment. Keeping the credit utilization rate under 30% and making the monthly payment promptly will help you to improve your credit score. Your credit score will increase when your credit account ages and shows a track record of on-time payments.
- Reduce Your Stress
It can put a lot of pressure on you when you are not earning enough and there are piles of debts waiting for you to pay off. Every month, you are worrying that you won’t be able to make it in paying off some of your debts. Stress makes your life harder and you are unable to lead the satisfactory life you want. If you have steady employment, you could apply for a personal loan to consolidate your credit card debts.
- Pay Off Your Credit Card Debt Faster
There is a saying that it can be impossible to pay off your credit card debts. Credit cards only require you to make a minimum payment every month. If you only make the minimum payment, you are only paying the interest fee. You will never pay off your debt if the actual amount you owe keeps getting rolled over to the next month.
The lender doesn’t care as he just wants to make money on the interest. The lender won’t care if it takes you 10, 20, or 30 years to pay off our debt. On the other hand, if you consolidate your debt with a personal loan, you will be able to pay it off in 2 – 5 years. The monthly payment is fixed so you will be paying the same amount every month until the end of the loan term.
- Encourage You to Spend More
Debt consolidation does not solve your underlying financial issue. Freeing rooms in your credit card balance can motivate you to spend more. You must make the decision yourself to stop your spending habit. If you can’t control yourself, you can use the scissor to cut the credit card in half. Instead, you should set a budget every month and stop spending money on unnecessary things.
- You May Have to Pay Additional Fees
Not only do you have to pay the interest but you also have to take into account other fees like origination fees and prepayment penalty fees. Before you apply for a loan, make sure you check all the fees that you are supposed to pay. This will prevent you from getting any surprises after you sign the agreement and accept the loan. You must make sure you have a steady income to cover the monthly payment and other fees before applying for the loan.
- You May Be Paying a Higher Interest Rate
You must have a high credit score if you want to take advantage of the lowest interest rate of a personal loan to consolidate your debt. If your credit score is low, paying off your debt with a personal loan will be more expensive since you will be charged with a higher interest rate. This could mean that you pay more origination fees and higher interest fees over the loan term.