The average American will end their life with 62,000 dollars of debt to their name. While there is such a thing as “good debt,” it’s more often the case that we have bad debt. Credit card debt, a payday loan, or any other loan that holds no value is considered bad debt.
The situation compounds and becomes suffocating when there are multiple sources of debt. Maybe you have a few different credit cards in the whole or you’ve taken out multiple personal loans from different firms.
Whatever the case, it is extremely difficult to manage payments from multiple lenders. If you’re in this situation, you should consider the pros and cons of debt consolidation.
Pros and Cons of Debt Consolidation
Debt consolidation is a way to move all of your debt to one place. In order to consolidate your debt, you must take out a loan of the sum of your debts.
That loan is used to pay off any debts that you have coming from multiple sources. While you’ve paid off your prior debts, all of the money still needs to be paid to the new lender. There are a few pros and cons to doing this that we’ll cover.
The Pros of Debt Consolidation
The obvious benefit of doing this is having all of your payments going toward one place. This is great because everything is moved into one payment and you don’t have to worry about multiple dates and fees.
You won’t risk having late fees for the various lenders that you have obligations too. Often times, those late fees are what keep you in debt.
Interest Rates
Another wonderful part about debt consolidation is the fact that you have one, constant interest rate on all of the money you owe. When things are scattered, some loans might have extremely high interest rates. Credit cards and payday loans typically have very high rates.
Those debts also compound very quickly. This means that the value of your debt increases a lot, and fast. There are ways to consolidate your date with extremely low interest rates.
Many consolidation loans have rates lower than 10 percent, while credit cards usually have interest rates that can move above 20 percent.
You’ll Be Out Of Debt Sooner
Having less to worry about and lower interest rates will result in you making manageable payments more consistently. Late fees will come less frequently and you’ll be better able to make the principal and interest payments.
Your Credit Will Thank You
One consequence of crippling debt and missed payments is a dent to your credit score. Your credit is hurt every time you miss a payment or default on your account.
Large debt can also lead to bankruptcy in many cases, which is one of the worst things that can happen to your credit score. Consolidation will significantly lower your chances of missing payments, thereby saving your credit score from inevitable damage.
The Cons of Debt Consolidation
Consolidation isn’t all peaches and cream. There are some difficulties and downsides that need to be considered.
You’re Still Responsible
The situation may be that your initial debts were the result of personal habits. While it can be extremely difficult to dig yourself out of a whole once you’re in, personal habits remain the same after consolidation.
This means that you need to work on yourself and change the habits that kept you in dept in the first place. It may seem less significant to miss your consolidation payment because it’s only one fee but remember that the loan is much larger.
Because its the combination of all of your debts, the interest rate and fees will still be pretty big.
The Rate Might Not Be Great
If you’ve had enough trouble, your credit might be poor enough that the rate on your consolidation loan is not much lower than your credit card rates.
If you have poor credit, you’re not entirely out of luck. There may be some options with extremely low rates still available to you. There are also bad credit loans to look at if you are in need.
Remember that these loans typically have high interest rates, though. This isn’t a bad thing, but they should only be taken out if you know that you’ll be able to pay them off quickly. The most important thing is that you’re engaging with an honest company.
While many easy lenders boast quick money and simple financing, a lot of them are not as simple as they seem. Payday loans come in handy for those that need fast cash, but the interest rates can sometimes be over 100 percent. The fine print is of great importance when you’re looking into these loans.
The last thing you want is to get deeper into debt, so make wise choices.
What are the Options?
There are a few ways that you can consolidate your date. They work in mostly the same way, but some methods might suit you better than others.
Balance Transfer
You can choose to use a balance transfer if you’ve retained excellent credit. This is usually the case if you see the problem early and take fast action to consolidate your debt.
These allow you to have interest free debt for two years. Two years. The only fees you experience will be for the transfer.
Unsecured/Secured Consolidation Loans
These loans are “unsecured” because they don’t require any collateral. If you can find an unsecured consolidation loan with a low interest rate, it is always better than a secured consolidation loan.
Secured loans require collateral, typically your home, and are just too risky in most cases. Unsecured loans typically require that you have a minimum annual income, and usually work only if your debt-to-income ratio is below 50 percent.
There May Be Other Options
The pros and cons of debt consolidation lean heavily toward it being a good thing. The cons are mostly issues that you have to face whether or not you choose to consolidate.
That being said, you still need to run the numbers. You may be better off keeping your debts the way they are and paying them or taking another option. Click here for more ways to get out of debt.
