Debt consolidation loans are those that enable you to combine all your other debts into one and have just one monthly payment. You can consolidate your payday loans, medical bills, student loans, and credit card debts into one loan and then service it as such. Debt consolidation is a good idea if you do not want to deal with the stress of dealing with multiple loans, often with a high-interest rate. You must be aware of all your options and the companies that will give you the best deal. You can check out Dallas News for more information about this. Here are some pros and cons of making such a move.
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Pay Less Interest
You get a chance to lower the interest you pay on your debts individually when you consolidate them into one. Different types of debts come with varying interest rates. For instance, student loans often have lower interest rates when compared to credit cards. Consolidating them into one helps lower the rates of others but could still be a little higher than others. It would help if you focused on the general savings you stand to get when you pay them all as one.
Servicing One Loan
Service just one loan is the primary goal of consolidating your debts in addition to other benefits. When you only have one payment to make, you reduce the chances of late payments and get a chance to improve your credit rating. You get to plan your finances better and avoid taking on extra debt if you already have one you are servicing. Ideally, consolidating your debt gives you some sense of discipline.
Reduces your Monthly Installments
With a consolidated loan, you get to pay reduced monthly payments. Your future payments get spread over a longer period reducing the installments you must pay. Some companies even pay off your debt, then recalculate your debt and interest. You reduce the strain of paying the small payments that accumulate into a big amount and instead pay just a little from your income. You may end up paying more in the long run without the pressure from multiple lenders.
Improve Your Credit Rating
Multiple debts can put a strain on your income. At some point, you might miss some payments, thus affecting your credit rating. If you consolidate your debt, you cut off the revolving credits like credit cards. Such debts appear as a reduced debt burden on your credit report. Having all such debts rounded off into one reduces your utilization rate to below 30% and helps you have a good credit rating.
Cons of Debt Consolidation
Interest Rate Could Rise
Your interest rate could go higher than your current debts if your credit score is not competitive enough to get good rates. Lenders with favorable rates could refuse to consolidate your loans due to your rating, as they could spend more to bring your respective lenders on board. If you have a poor credit score, you may end up paying other fees like origination fees, and lenders could demand a higher interest to consolidate your loan. It would be better in such a situation to pay off your respective loans without fail until you improve your credit rating. You will avoid paying more in the long run.
You May Miss Payments
Consolidating debts is a good way of paying off your debt, but it could take a toll on you if you fail to budget appropriately. Consolidating debt does not mean paying less of your debts; it just means bringing all your debts together and calculating a sum you can comfortably pay. If you overestimate your capacity to pay, you could fail to include some loans, which could hurt your credit rating.
You May End in More Debt
Consolidating debt could give you the notion that you are paying less of your debts. In essence, what this loan does is help you clear your debt in a manageable way. You must maintain the discipline to pay the reduced monthly installments to clear all your debts. Unfortunately, in some instances, you may succumb to spending more and get into more debt, defeating the main idea of helping you settle your debt.
Does not Solve Financial Problems
Bringing your debts together will help make paying them easier but will not solve your underlying financial problems. After consolidating your debt, you need to curb your spending and pay as much as possible to offset your debt.