- 2 Mar 2021
- 4 minutes
Debt consolidation is done by taking out a loan to pay off many others. Debtors are often advised to consolidate their debt if they can get a lower interest rate. Many people have found debt consolidation as an effective debt management strategy. A debtor that is obliged to make monthly payments to about four or five lenders, can borrow money and pay off all the other debts, leaving him/her with just one loan, which may have a lesser interest than all the previous ones put together. You are advised to read more about what the best loans rates in the US are and the best ways to find them. Here are some Advantages and Disadvantages of Debt Consolidation
Pros of Debt Consolidation
Good Credit Rating :
When a credit agency gives high positive opinions about how willing you are to offset your financial obligations completely and without delay, you stand a better chance of getting approval for a subsequent loan. There are other ways of acing your credit ratings, such as sticking to every monthly deadline, but consolidation is way faster. Your issuers of debt can't help but marvel at the possibility.
Consolidation helps you to get rid of multiple deadlines for payment of Student Loans and Personal Loans.
When there are several due dates on your Student loans, personal loans, and other credit facilities, there is a tendency that you might forget and miss a deadline. Not meeting a monthly payment deadline can be detrimental to your credit rating. When multiple loans are running concurrently, there is a need for proper debt management.
Creditors are at liberty to send emails and text messages reminding you of the need to pay on a pre-agreed date. Debt consolidation makes you have more disposable income since you will be paying less. You may choose to adjust your budget to accommodate other necessities or you can save up the extra money for your next deadline. Piccadilly loans offer loans to US residents at a good interest rate
Debt Consolidation loans help to reduce stress.
Worrying about several debts to pay can increase a person's stress levels. Fatigue and mental imbalance may occur as a result, followed probably by a rise in blood pressure. More irrational decisions might be taken in this state and depression might even set in. Debt consolidation loans put debtors in charge of your finances, thereby channeling all your energy to one debt source.
Cons of Debt Consolidation
Some of the disadvantages attached to taking a debt consolidation loan are discussed below
To start with, it doesn't mean you are out of debt.
The fact remains that you are in a debt and instead of a paltry sum, it's a monstrous amount. It also does not solve future financial problems. A successful consolidation might just encourage you to keep taking loans as soon as you are debt-free.
In a similar development, the loan could come with higher interest rates.
Compared to rates on normal loans, the rates on consolidation may be higher. You might not notice the high-interest rates because you are so excited over the fact that you are going to finally meet the rest of your multiple debt obligations. Your monthly repayment plan might also be high especially if the principal is a big amount. This is not to mention some advance fees like balance transfer, loan organization, and closing costs that may come with debt consolidation.
It may take a longer-term to pay off the loans you have consolidated.
As a result, the total interest to be paid over the consolidated loan may be greater than it would have been if paid on individual debts. You also run the risk of collateral repossession if the consolidation was secured to an asset. In this case, failure to meet up with payment may cost you your retirement funds, your life insurance, or your house. If you decide to take an unsecured loan, it will be very difficult unless your credit ratings are stellar. And if you eventually qualify, you will get the loan with several extra charges attached. You are advised to check reviews about Credit Angel.
Now that you know debt consolidation has its cons, what other steps can you take to solve your financial issues? A good start is by stripping down your budget to basic needs. People who have taken a course on wealth management and have sought money advice services tend to do this easily. Also, ensure to read the terms of any loan before you take it.
While debt consolidation increases your credit ratings, eliminates multiple deadlines, and helps to reduce stress, it can also cost you your valued assets, make you lose money on interest, and it doesn't make you debt-free. It is wise for you to weigh up your options in taking an informed decision on whether or not to consolidate your loan