If you are looking for a way to manage your multiple debts, getting a debt consolidation loan might be the answer. A debt consolidation loan can help you take control of your debts by combining them into a single payment account. This type of loan may have a relatively lower interest rate than your original debts.
The Pros of Getting a Debt Consolidation Loan
Consolidating your debts into one loan has so many advantages. It includes a more streamlined and faster payoff with low-interest rate payments. To know more, below are some of the pros of taking out a debt consolidation loan:
Streamline Finances
If you choose to consolidate your multiple debts, it will reduce the number of payments and interest rates you have to manage monthly. Debt consolidation can also help you lessen the chances of missing or making late payments since you will only have to worry about a single payment. Moreover, not having missed or late payments can help a lot in increasing your credit score.
Might Provide Lower Interest Rate
If you have an excellent credit score, you might be able to get a debt consolidation loan with a lower interest rate. Working with a reputable lender, such as Credit Ninja, can help you achieve that.
Might Expedite Payoff
If you can grab a debt consolidation loan that offers a lower interest rate than your original individual debts, it would be best to make extra payments with the funds you would save every month. That way, you can pay off your debt faster, which saves you more money in the long run by reducing the interest amount.
Might Help Reduce Your Monthly Payment
If you choose to get a debt consolidation loan, your monthly payment will most likely decrease. The reason behind this is that your future payments are stretched over a new loan term. It can be a great benefit when it comes to your monthly budgeting standpoint.
Can Boost Your Credit Score
When you apply for a new loan, your credit score might go down a few points due to hard credit inquiry. But, taking out a debt consolidation loan can help improve your credit score in several ways.
For example, if you pay off your revolving lines of credit, your credit utilization rate will most likely reduce and show on your credit report. It is recommended to have a credit utilization rate under 30%. With debt consolidation, you can surely accomplish that. Making on-time and consistent payments can also help improve your credit score.
The Cons of Getting a Debt Consolidation Loan
A debt consolidation loan offers several benefits. However, you still need to watch out for the risks involved in this type of loan.
Might Come With Added Costs
A debt consolidation loan might come with additional fees. It includes balance transfer fees, origination fees, annual fees, and closing costs. So it will help if you make sure you know about these fees before getting a debt consolidation loan.
Could Provide You A Higher Interest Rate
A low-interest rate debt consolidation loan is not guaranteed. Getting one is a good thing; however, if you get the opposite, you might end up paying more on your loan. That is why it is best to shop around and look for lenders who can offer you a debt consolidation loan with a low-interest rate.
You Might Pay More In Interest In The Long Run
Even if you manage to get a debt consolidation loan with a low-interest rate, you might still end up paying more interest by the time the loan ends. The repayment terms start from the first day and might extend even longer when it comes to debt consolidation. It means you might have lower monthly payments, but your interest rates will continue to accrue over time.
It is best to pay more than your minimum payment. That way, you can pay off your loan faster, and the interest rates will stop accruing for a more extended period.
You Might Risk Missing Payments
It is vital to know that missing payments on any loan can hurt your credit score. It is recommended to use autopay or any other financial tool to help you avoid the risk of missing or making late payments.
Final Thoughts
Knowing the pros and cons of taking out a debt consolidation loan can help a lot in deciding whether or not you should get this type of loan. If the benefits outweigh the drawbacks, it might be best to get a debt consolidation loan. However, if taking out a debt consolidation loan will only harm your finances, getting one is not a smart move.
