As its name suggests, debt consolidation refers to putting multiple debts into one big amount. You can do this by taking out a new loan and using the funds from that loan to pay off all your other existing debts. Then the responsibility is now on you to pay off that new, bigger loan you’ve taken.
Debt consolidation is touted by financial consultants, bank managers, and even debtors themselves, who have chosen this route as one of the most strategic solutions to free up time and money in the short run while lowering interest rates in the long run.
Although it sounds like an ideal solution, debt consolidation still isn’t perfect. There are benefits, but there are drawbacks as well. Knowing what those are and getting the best debt consolidation loans & advice allow you to make a more informed choice and be confident that debt consolidation is the best way.
It Results In Faster Debt Repayment
Taking out a debt consolidation is an excellent way to repay debts faster, especially if you have quite a significant amount of credit card debt. Consolidation loans have fixed monthly payments, within a specified timeframe from the beginning to the end, unlike credit cards that don’t. This means that with consolidation loans, you have that push and pressure to make it a part of your monthly budget to pay off the amount.
While this can feel like a big blow to your monthly budget within the next few months, remember that your best takeaway is that the sooner you can pay off your loan, the lower the interest rates will be. On top of that, the faster you pay off your debt, the sooner you can start putting money toward your other financial goals.
It Streamlines Your Finances
Combining multiple outstanding debts into a single loan reduces the interest rates and debt payment schedules you must keep track of. With this, your finances are significantly streamlined, being that this time around, the likelihood of missing out on a payment due date is reduced.
Regarding credit card debts, it’s essential to be aware that late payment automatically translates to interest payments. It’ll hurt your financial health in the present and future when you have interest to pay instead of having money to save.
It Comes With A Fixed Repayment Schedule
Most borrowers wishing to consolidate their current loans usually take out or apply for a personal loan to pay off their debts. A characteristic of personal loans is that they come with a fixed term, with payments divided equally monthly. This gives you better control over your finances, as you have a fixed repayment schedule. It’s better and very different from credit card debts, where if you only pay the minimum interest per month, it’ll take so many years before you can pay it in full.
This payment scheme means that the payment and interest rate remain the same for the length of the loan. Hence, there’s no unexpected increase or fluctuation in your monthly debt payments unless you pay more than what’s required monthly.
It May Result In Balance Transfer Or Upfront Origination Fees
Before you can successfully transfer all your credit card and loan balances into a single loan, you may have to take upfront origination fees for that new loan or pay balance transfer fees for the credit card. These aren’t fixed, as banks and lending institutions usually charge this as a percentage of the amount you borrow.
Calculate this amount first to be sure they’re not unusually high. That way, you can be confident that debt consolidation is best.
It May Not Give You The Lowest Rate You’ve Hoped For
Balance transfer cards or loans are tough to qualify for, particularly for those with high outstanding debts. Credit institutions are keen on checking through your credit score, which, with those debts, may not necessarily give you a big one.
Buyers of balance transfer cards or debt consolidation loans who are offered the lowest rates are usually those with the highest credit scores. Hence, unless the lender can offer a lower rate than your current debts, debt consolidation may not necessarily be the best idea for you.
The Bottom Line
Between all the loans you could have right now, there’s no denying how it can be pretty challenging to keep track of all the payment deadlines and amounts for each. It might seem harmless to skip one, but the truth is that the effects are more dire than you imagine. Interest can pile up quickly, bringing you even more financial challenges. This is where remedies like debt consolidation come into the picture. It can help streamline your finances, among other benefits, but it’s also not without drawbacks. Before considering this as a solution, it’s best to be informed whether it is the best remedy. The read above should be strong enough to help you out in this regard.