Between personal loans, car title loans, credit cards, and mortgages, it takes work to track and pay them all. Debt consolidation allows borrowers to combine their loans into a single payment. You have to take note though, that while this convenient type of loan can help you streamline your finances, it will not resolve any underlying issues of your debt.
Consolidating debt is a matter of knowing what benefits you get and what drawbacks you can expect. Knowing the pros and cons of debt consolidation can help you decide if getting a new loan is right for you. With this guide, we’ll walk you through the nitty-gritty of loan consolidation and help you make an informed decision.
What is Debt Consolidation? A Quick Start
Debt consolidation is a process used to pay off several debts with a new, unsecured personal loan or a new credit transfer. These types of loans usually come with a lower interest rate, especially compared to your previous debts.
What is an unsecured personal loan?
Simply put, unsecured personal loans neither require collaterals nor a guarantor. This allows for a much better borrowing option with fewer risks, especially if you have risky types of loans that either have high-value interest rates or require collateral.
As you consolidate debt, you will encounter two types of payment options for your previous loans. You have the opportunity to either:
- Receive cash and pay off your loans; or
- The lender will pay off the loans on behalf of the borrower
If you use a balance transfer credit card, you can also access a 0% APR feature for a certain period. The feature lasts between six months to two years, depending on the card and the right qualifications.
If you’re unsure if a debt consolidation loan is right for you, knowing the good and the bad can help. You can see the pros and cons of debt consolidation and see if they are right for you.
An expert lending institution can also give you solid advice, especially if you’re more interested in concrete numbers.
Pros of Debt Consolidation Loans
Debt consolidation loans are among the best, risk-free ways to get out of debt. With a good loan provider, you will reap the following benefits out of this type of credit.
1. It Helps You Repay Your Debts Much Faster
One clear benefit of consolidating debts is that it allows you to repay your debts much faster. While this doesn’t seem like a clear upside, fast-tracking your debts can prevent your interest from further accruing. This is especially true with credit cards, where interests grow even if you pay off the minimum.
Repaying your debts faster also gives you more chances to put more money into your other goals in life. The last thing you want is to be saddled by debt for years.
2. It Streamlines Your Debts
Having multiple sources of debt can be painful and overwhelming. It’s tiring, especially when you start budgeting your monthly expenses. Debt consolidation allows you to streamline your finances, cutting down the number of payments that you need to make.
Consolidation gives you a chance to prevent having to pay late fees on some loans or miss them in their entirety. This also prevents you from having subsequent interests running simultaneously, which results in a more significant debt overall.
If you aim to get out of debt, loan consolidation might be the right solution for you.
3. It Lowers Your Interest Rates
The essential advantage that you’ll get from debt consolidation is lowering your interest rate. With some loans, your interest rates are either fixed or variable. This can result in high interest rates, especially for loans that have a short payment period.
If you’re tired of astronomical interest rates, a fixed-rate consolidation loan is what you want. Before you get your loans consolidated, do it with a trusted lending corporation. You want precise information on the maximum rate that your lender can get charged for.
Cons of Consolidating Debt
Much like with any type of loan, there are also some disadvantages to debt consolidation. These risks and disadvantages are standard with this type of strategy; hence it may not be a solution for everyone.
1. It May Result In Higher Interest Rates
A debt consolidation loan is a boon when you qualify for a lower interest rate. If you get something low enough, streamlining your debts is a great option. If you don’t qualify for it, the problem starts with a potentially higher interest rate.
Check your credit score to make sure you can qualify; otherwise, you’ll be stuck on a rate that may result in more payments overall. Don’t be stuck on interest either. You may find higher origination fees that will still cost you more over time.
2. It Does Not Wipe Your Debts
A debt consolidation loan is a different personal loan. It does not wipe out your debts. It does not guarantee that you will never get into debt again. Debt consolidation gives you a chance to put together everything you owe in a tidy package and divide it into manageable chunks.
If you have a terrible history of living beyond your means, you should expect the same thing to happen unless you do something about it. Set a specific budget and stick to it. Once you get out of debt, the next order of business is to build yourself an emergency fund that you can use when problems come up.
3. It May Put You Into A Cycle of Debt
Paying off other debts through debt consolidation can create an illusion that you achieved something; you would think that you have more money than what you have. The truth is that you can fall into a cycle of debt – paying them, getting new ones, and paying new ones again.
Be truthful with yourself if you plan on taking out a debt consolidation loan. Know why you need it and have a budget as you pay for your loans.
The Bottom Line
As you sign for a debt consolidation loan, review your existing loans, minimum payments, and the repayment period. Compare it to the final value that you need for consolidation and see if it can help ease your burden.
Be careful with your loans, and remember that it does not immediately resolve all your financial problems. It is an essential financial tool that will make your life much easier. Talk to a trusted lending company that can help guide you through the process of consolidating your debts.
Payment1 makes financial decisions easier, dedicated to making it convenient for you to take care of your finances. Whether you need a quick car title loan or you want to consolidate your debts through a personal loan, they can help. Talk to Payment1 now and get the right financial solution you need today.