Debt consolidation involves packaging different types of loans into a single but larger loan, usually at a lower effective interest rate. Debt consolidation makes it easier for borrowers to manage and repay loans. Depending on your financial situation, you should consider the pros and cons of debt consolidation to determine whether it is the right solution for you/ In this article, we will discuss the pros and cons of debt consolidation:
Pros of Debt Consolidation
1- Early repayment of debt
If you get debt consolidation at a lower rate than your existing loans, you can save plenty of money on interest charges. You can add the money you saved from a lower interest rate to your next loan instalment which can help you pay off your debt a lot quicker.
2- Simplify debt management
Because debt consolidation combines different types of loans into a single loan, managing it becomes a lot easier as you have to deal with a single loan instead of multiple loans. You don’t have to remember multiple due dates and installments of different loans after you consolidate your loans.
3- Potentially lower your interest expense
You should aim to consolidate your loans at a lower interest rate to save money on interest charges. If you can get a lower interest rate on your consolidated loan, you can save a significant amount of money over the loan term.
4- Improve your credit score
Timely repayments have the most weightage in the calculation of your credit score. So, when you make several payments after debt consolidation, you can improve your credit score.
Cons of Debt Consolidation
1- Fees
Debt consolidation involves fees, such as loan origination fees, closing costs, balance transfer fees, annual fees, and others. So, you should account for these costs before opting for debt consolidation.
2- No guarantee of getting a lower interest rate
There is no guarantee that you will get a lower interest rate on the consolidated loan, particularly if you have a low credit score and a high debt burden. So, if you don’t get a lower effective interest rate than your existing loans, debt consolidation might prove costly.
3- No reprieve in the total amount of debt
When you consolidate your debts, you still have to pay the same amount of debt as you are merely merging your loans into a single loan. So, you still have to manage your finances effectively to repay your debts timely.
4- Temporarily lower your credit score
When you apply for debt consolidation, it is reported as a hard inquiry on your credit report, which can lower your credit score temporarily. However, when you start making timely repayments, you can then gradually improve your credit score.
Final Thoughts
Debt consolidation is a popular debt management strategy with plenty of benefits. If you have plenty of loans and can get a lower interest rate on the consolidated loan, you can consider opting for it. However, you should consider the pros and cons and your current financial condition to determine whether you should consolidate or not.
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