Pros And Cons of Getting A Debt Consolidation Loan
Financial issues are something that a vast majority of people are familiar with, which makes it easy to conclude that falling into debt can happen to practically anyone, especially to people who tend to overspend, or must rely on their credit cards to pay for essential things.
As mentioned above, falling into debt is easy, but unfortunately, getting out of it can be pretty challenging, mainly when interest rates are enormous, and monthly payments are extremely high. Are you currently experiencing something like this?
If the answer is yes, then maybe it’s time to consider a personal loan for debt consolidation. If you are unfamiliar with it, then look at the facts below that we compiled in this article for you.
You’ll Be Able To Repay Debt Relatively Fast
Relying on a debt consolidation loan can help put you on a quicker track to a complete payoff, particularly if you have considerable credit card debt. In these instances, taking loans to refinance your credit card debt is a great option. In case you didn’t know, credit cards do not have a determined timeline for paying off a particular amount of money. However, a consolidation loan has fixed payments each month with a beginning and end to the loan.
Bear in mind that repaying your debt fast is always a good thing, and it also means that you will pay less interest overall. Additionally, the quicker your debt is paid off, the sooner you’ll be able to set aside some cash for other purposes, like a retirement fund, emergency fund, etc.
You, Will, Have Only One Monthly Payment
Another benefit of a debt consolidation loan is precisely this one. Namely, consolidating allows you to combine your debt into a single payment with a fixed interest rate that’s not going to alter the life of the loan.
More importantly, consolidating offers you a clear finish line to being free from debt, significantly if you didn’t develop any debt payoff plan.
It Can Enhance Your Credit Score
One of its biggest virtues is that it can enhance your score in various ways. For instance, paying off revolving lines of credit, such as credit cards can decrease the credit utilization rate that can be seen in your credit report.
It would be amazing if your utilization rate is under thirty percent, and that’s precisely what this tool can help you accomplish. Making continuous, on-time payments and at some point, paying off the loan can most definitely enhance your credit score over time.
Although consolidating debt offers numerous benefits, keep in mind that it cannot guarantee that you won’t be dealing with debts in the future. This particularly refers to individuals who are prone to repeating the same mistakes (regarding their finances), and who tend to live beyond their means.
Now, if you want to avoid dealing with this problem all over again, then it would be recommendable to simply set a realistic budget and stick to it. In addition, you can also start developing an emergency fund that can be employed to pay for any unplanned things so that you do not have to solely rely on your credit cards.
The whole point of this segment is to remind you that consolidation is not a permanent fix and that you need to change certain spending habits in order to avoid falling into debt again.
You May Not Get Approved For A Lower Interest Rate
The interest rate you can receive for any type of loan or line of credit will depend on your credit report and score. In these types of situations, it’s always best to have a high credit score because it will enable you to qualify for a low-interest rate.
On the other hand, a relatively low credit score allows you only higher interest rates. Now, if by any chance you’ve already applied for other lines of credit (recently) then it would not be wise to apply for a new loan.
Why is that? Well, that’s because too many inquiries on your credit report can reduce your credit score and cause higher interest rates. Although you will most likely be approved for the loan even in these instances, it would still be wise to postpone it if you’ve already applied for other lines of credit.
As you can see, a debt consolidation loan comes with both advantages and disadvantages. If you’re still having second thoughts about it, then simply go through this article to decide if it’s truly wise to apply for it or not.