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Summary
- Debt consolidation combines multiple debts into one payment, potentially at a lower interest rate, but may not suit everyone.
- Benefits include more manageable payments, lower interest rates, and faster debt payoff, depending on credit score.
- Challenges include difficulty qualifying, additional fees, and increased risks of missed payments.
- Consider consolidation if juggling multiple payments is challenging and if you have a good credit score.
- CreditAssociates® can help reduce what you owe by up to half in as little as 24-36 months.
The Pros and Cons of Debt Consolidation
Debt consolidation is a popular solution to debt problems, allowing you to take multiple debts and combine them into one monthly payment, usually at a lower interest rate. However, some drawbacks may make debt consolidation an incomplete answer for many people. This blog post will explore the pros and cons of debt consolidation, so you can decide whether this is the best option for your situation.
What is debt consolidation?
Debt consolidation is the process of taking multiple debts and combining them into a single payment, often at a lower interest rate. It’s usually marketed as an opportunity for people to get their finances in order by paying off all their debt with one large loan or credit card balance.
Is debt consolidation a good idea?
This depends on your situation. Debt consolidation isn’t always the right answer for everyone. In fact, some studies have shown that people who consolidate their debt end up spending more money on interest than they would if they’d just kept paying off each loan separately. It all depends on how much you currently owe and what type of consolidation loan you can qualify for. Typically these loans can be harder to qualify for and actual financing (such as interest rates) will depend on your credit score.
Pros of Debt Consolidation
There are several elements of debt consolidation that could make it an attractive option.
It could help make payments easier.
Consolidating your debt will allow you to focus on a single monthly loan payment instead of keeping up with multiple monthly payments to various creditors. Having fewer bills to keep track of can also help make it simpler to budget your money and track spending.
You could benefit from a lower interest rate.
If you have great credit, you could qualify for a lower interest rate on the debt consolidation loan than what you’re currently paying your existing creditors, such as credit card companies. A lower interest rate is beneficial because it means more of your payment each month is going toward paying off the principal amount, allowing you to make more progress in a shorter amount of time.
You could pay off your debt quicker.
As stated above, if you qualify for a lower interest rate, a larger percentage of your monthly payments will go toward paying down your principal debt amount. This means you could pay off your debt more quickly than if you continued to make minimum payments on higher-interest lines of credit, such as credit cards. However, keep in mind that actual financing for these loans will be based on your credit score.
Cons of Debt Consolidation
As with any debt relief solution, there are several drawbacks for debt consolidation that you should be aware of. It’s important to weigh both the pros and cons before making a decision.
Debt consolidation loans can be harder to qualify for.
If you don’t have great credit, you might not qualify for a debt consolidation loan. If you do qualify, it’s possible the loan amount could be for less than what you need to cover the entirety of your outstanding debts. Which means, you’d still have to figure out a solution for the remaining debt amount.
You’re subject to additional fees.
Debt consolidation companies will charge you a fee to consolidate your loans, which can be anywhere from 1% to 5% of the total balance. In some cases, you’ll also have to pay closing costs on a new loan or other fees. These costs are added onto your total debt amount.
Missing payments comes with greater risk.
Missing payments with debt consolidation can be disastrous to your financial health. Being behind on your payments will only cause your debt to grow as high-interest rates kick into gear.
Creditors are also more likely to report you as delinquent if you miss payments on a debt consolidation loan, which will lower your credit score. The negative record on your financial history can also make it much harder for you to get approved for loans in the future. In some cases, you could even be subject to legal action for defaulting on these loans.
If you’re struggling to make your current payments, or you feel like you owe too much to be able to pay back the loan, this might not be the best option for you.
Debt consolidation doesn’t prevent future debt.
Debt consolidation may encourage you to develop bad habits because you’re simply transferring your debt from one account to another. This can lead to a deceptive sense that things have “gotten better” when in reality you’re still in the same place, financially. It’s important to consider both your short-term needs and long-term goals when choosing a debt relief solution.
When should you consolidate your debt?
Debt consolidation could be beneficial if you’re struggling to juggle multiple monthly payments to various creditors and would prefer a single monthly payment instead. Debt consolidation is also typically more advantageous for people with good credit as qualification and financing terms will be based on your credit score.
How can CreditAssociates help?
CreditAssociates can help you reduce your debt and give you the financial freedom you deserve. Call or fill out our form to start your free, no-risk debt consultation with one of our certified debt consultants. Or check out our debt calculator to see how much you could save!
Common Debt Consolidation Questions:
What’s a good interest rate on a debt consolidation loan?
A reasonable interest rate on a debt consolidation loan is typically between 3% and 6%. But, of course, the interest rates on debt consolidation loans will be based on your credit score and can vary depending on what type of debt you’re borrowing the money for and how much you’re borrowing—so it pays to shop around.
Do consolidation loans hurt your credit score?
Debt consolidation loans have the potential to hurt your credit score because they show up as a credit inquiry and can lower your average age of credit which both negatively impact your credit score. The best way to avoid damaging your credit score is by paying off the consolidation loan within a year and not taking on any new lines of credit while you have the loan.
If you can’t afford to pay back what you owe or are struggling to make your current monthly payments, a good alternative is debt settlement, which does not involve borrowing money, in fact, it can reduce the amount of debt you’re required to pay back. Debt settlement could have an initial negative impact on your credit score, but the net effect will be positive as your debts are reduced and resolved. It can also be a quicker process than debt consolidation.
Where’s the best place to get a debt consolidation loan?
The best place to get a debt consolidation loan is from a financial institution, such as a credit union.
What’s the smartest way to consolidate debt?
The most intelligent way to consolidate your debt is to get a debt consolidation loan from your financial institution. You should know that this will impact your credit score, but you can help minimize the negative impact by paying off the loan within 12 months, and by not taking out any new lines of credit while you’re consolidating with one lender.
Is it better to get a personal loan or debt consolidation?
Debt consolidation loans are typically used to pay off debts whereas personal loans can be used for various reasons, like buying something on credit or investing in stocks. So, when you use a personal loan to pay off debts, the loan essentially becomes a consolidation loan.
How long does debt consolidation stay on your credit report?
Debt consolidation will typically take longer to complete. CreditAssociates can provide you with a free debt health check that will help you monitor your progress get back on the path to financial freedom today.
What credit score do I need for a debt consolidation loan?
When it comes to getting a debt consolidation loan, you’ll typically need a credit score of at least 580. However, the best consolidation loans are typically reserved for those with great credit. Read more on credit scores in this blog post.
If you don’t have good credit or don’t want to take out a new loan, debt settlement might be a better option for you.
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