When it comes to personal finance, making the right decision for your situation is very important. Debt consolidation loans are a great way to lower your interest rate and save you money in the long run, but taking out any kind of loan is a big financial decision so it is important to weigh up the pros and cons. In this blog post, we will share 10 important factors to consider before you consider debt consolidation.
What is debt consolidation?
Debt consolidation is the process of combining all of your small, high-interest loans into one larger loan. The goal is to lower your monthly repayments, and possibly save on interest rates. This makes it easier for you to keep up with your payments and ultimately saves you money in the long run.
The pros of debt consolidation
If you’re struggling to keep up with multiple loan repayments each month, it can be a real relief to consolidate your debts into a single loan. This has several advantages:
- Monthly payments are more affordable. Loansmart customers save on average 40% a month off their repayments.
- If you qualify for a lower interest rate than what you’re currently paying, consolidating your debts could reduce the amount of interest you pay over time.
- All your existing debts are repaid which means if you make your repayments on time for your debt consolidation loan, your credit score will improve.
- Repaying all of your existing debts also means now you only need to keep track of one loan and its payments.
- Having a clear finish line in sight can also be motivating, as it gives you an exact deadline for becoming debt-free.
The cons of debt consolidation
Now, this all sounds great, but before you go out and apply for a debt consolidation loan it is also important to consider the potential drawbacks of taking out debt consolidation loan.
- Repaying your loans early may result in early settlement fees.
- You may also incur an establishment fee when you take out your new loan.
- It may be tempting to use the loan for something else instead of paying off your existing debts. That is, unless you choose a lender that settles your debts on your behalf.
- If you have credit cards that are repaid, you may be tempted to use them again unless you cancel them.
- Finally, taking out a debt consolidation loan will require another credit check, which will impact your credit score in the short term.
So, should I get a debt consolidation loan?
So, what’s the verdict? Well, it depends on your priorities and your situation. If your goal is to make your loan repayments more affordable then a debt consolidation loan could be a great idea. Choosing a lender that will pay off your existing debts for you is crucial if you do not want to fall into the debt trap again. Otherwise, you will simply double your debt.
It’s also vital you meet your repayments on time to built up your credit score, and ultimately pay off your loan completely.