There are many ways to tackle debt problems. One of these is debt consolidation. Debt consolidation involves taking out a lower interest loan and using it to pay off your existing debts.
Making just one monthly payment instead of several, and saving on interest in the process, sounds like the perfect situation, right? Not necessarily. Before you decide whether it’s right for you, it’s important to know the pros and cons of debt consolidation.
Pros of Debt Consolidation
Some of the best reasons to consider debt consolidation include:
- Lower monthly payments. Credit cards with high-interest rates can make your monthly payments soar. When you get a loan with a lower interest rate, the amount you pay each month goes down.
- Interest savings. One of the biggest advantages of debt consolidation is the potential for savings. A lower interest loan can reduce the amount you pay each month and also save you thousands in interest.
- Convenience. Keeping track of multiple debt payments can be stressful. It’s also easier to accidentally skip a payment. This can lead to late payments and other charges, as well as a poorer credit rating. A consolidation loan streamlines all your payments into one convenient monthly payment.
Cons of Debt Consolidation
While there are definite advantages of consolidating your debts, there are also some possible drawbacks. A few of these include:
- Loans can be hard to qualify for. Most debt consolidation loans are financed by banks. As a result, they usually require a good credit score and a stable income. If you’re having trouble paying your bills on time or your credit cards are maxed out, chances are your credit score may not be high enough to qualify you for a consolidation loan.
- Falling behind can cost you. Many people who consolidate their debts do so through a home equity loan. That means that the financial institution from which you are borrowing takes security on your home. A consolidation loan usually takes unsecured debt and replaces it with debt secured on your assets. This can be risky because if you fall behind on your payments on a secured loan, the lender can take your home and any other assets that were used as security to secure that loan.
- It may not solve the root of the problem. While paying off your debts with a consolidation loan may help you save money, it doesn’t address the reason you got into debt in the first place. For example, if you have a spending problem or you don’t know how to budget, you could find yourself with the same debt problems again in the future.
Making Debt Consolidation Work for You
If you would like to pursue a debt consolidation loan, these tips can help ensure you get the best loan for your situation:
- Shop around for the lowest interest rate.
- Read all the fine print and understand what will happen if you fail to make a payment or default on your loan.
- Pay more than the minimum payment. This will get you out of debt even faster. It will also give you a bit of a cushion if, at some point, an emergency comes up, and you have to miss a payment.
- Make sure you are aware of any fees.
- Research the company or financial institution. Steer clear of any company that has bad reviews or sounds too good to be true.
Debt consolidation can be a good option for paying off expensive, high-interest debt, and saving money. But it’s not for everyone. Make sure you know exactly what you’re agreeing to before taking a debt consolidation loan.
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Daniel Maksymchak, LIT
