DEBT CONSOLIDATION LOANS
Debt consolidation works best when debt is consolidated at a lower interest rate. When comparing debt consolidation loans, debtors look for low rates, flexible terms, and consumer-friendly features such as direct payment to creditors.
When debtors are unable to pay off debt, debt consolidation may be considered a viable debt management plan. Debt consolidation loans could save you money, but the decision is yours. This debt consolidation solution makes it possible to eliminate several payments in exchange for one affordable monthly payment that will make your debt easy to manage. Another option is debt settlement where you agree with creditors on a reduced balance so that you can repay your debts over time without your liability growing every month due to interest charges.
5 key benefits of debt consolidation
Debt consolidation is often the best way to get out of debt. Here are some of the main benefits.
1. Repay debt sooner
A debt consolidation loan may help you pay off your credit card balance to clear up the total amount of interest, especially if you have a significant balance. A consolidation loan has a fixed payment every month with an amortization schedule, but credit cards have indefinite payments.
2. Simplify finances
Consolidating debt will simplify your monthly payments and free up a little extra money for you because you’ll only have to worry about making one payment each month. Furthermore, the monthly payment is the same amount each month, so you know how much money to set aside.
3. Get lower interest rates
The average credit card interest rate is around 16%. On the other hand, personal loans carry an average interest rate of 11 percent. It stands to reason that rates vary based on your credit score and the loan amount and term length, but you’re likely to get a lower interest rate with debt consolidation than what you’re currently paying in credit card debt each month.
4. Have a fixed repayment schedule
Personal loans allow you to consolidate your debts and know exactly when the payoff date is. Check rates, terms, and features before applying for a loan. If you do not pay off a credit card at the end of every month, it may take years to pay it off.
5. Boost credit
If you are looking to reduce your monthly payment, a debt consolidation loan can work wonders. A debt consolidated loan may initially lower your credit score, but it is possible for the rate of this new loan to be reduced over time. This is because on-time payments are more likely to be made. Your credit score, which accounts for 35% of your creditworthiness, increases by managing one monthly payment at a time.
4 key drawbacks of debt consolidation
One of the main concerns about debt consolidation loans is that, in order to get your current full balance, you will need to find a loan with a smaller interest rate than the cards you have currently.
1. It won’t solve financial problems on its own
Consolidating debt with a personal loan does not necessarily mean you won’t get into debt again. If you have historically been living beyond your means, you might do so once again after free of the burden of debt. To avoid this, make a realistic budget that you can stick to. You should also start building a security fund, which can be used to cover financial surprises so that you don’t have to rely on your credit car.
2. There may be up-front costs
To save money, some debt consolidation loans come with fees. These may include:
- Loan origination fees.
- Balance transfer fees.
- Closing costs.
- Annual fees.
Before taking a debt consolidation loan, ask about any fees that may be charged.
3. You may pay a higher rate
Your debt consolidation loan may come at a higher interest rate. Your credit score could be a factor in any of these reasons, including your credit management.
As you think about debt consolidation, keep in mind what is best for your needs and goals going forward.
4. Missing payments will set you back even further
Missing a payment may cost you more than the monthly late fee. In addition, if a payment is returned due to insufficient funds (e.g., your bank account doesn’t have enough in it), some lenders will charge you a returned fee for paying the payment. These fees can increase the cost of borrowing.
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