Should you employ debt consolidation? – Pros and Cons  

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 Life isn’t cheap, and people often need or want more than they can afford – new house, new car, act. Here come banks or other creditors with enticing offers and promises – buy today and pay tomorrow. However, multiple different bills and loans may pose a problem, as they are hard to pay. Suppose you are spending all your salary on high-interest credit cards, personal loans, or medical bills. In that case, debt consolidation may become the solution, as it can combine them into one fixed monthly payment.

 

While getting a debt consolidation loan can definitely make sense if it lowers your annual percentage rate, don’t forget that refinancing debt has both pros and cons.

 

Let’s begin with the Pros – why should you consider debt consolidation?

 

First of all, you could receive a lower rate if you merge all your loans into one debt. That’s the biggest advantage of debt consolidation. It saves money and could eliminate the debt faster.

 

For instance, if you have to pay $9,000 in total debt, combined with an APR of 25%, your monthly payment will be $500, and you’ll have to pay $2,500 in interest over about two years.

 

However, if you take out a debt consolidation loan with a 17% APR and choose a two-year repayment term, your monthly payment would be $445, but you would save $820 in interest. It means that you could use the money you save on the lower monthly payment to pay off the loan earlier.

 

Besides, if you qualify for a balance transfer card, you would have to pay zero interest during the promotional period. That period can last up to 18 months. You will probably pay a 3% to 5% balance transfer fee, though.

 

You can use a debt consolidation calculator to see your total balance, combined interest rate across debts, and total monthly payment.

 

The second major advantage of debt consolidation is that you’ll have just one monthly payment instead of keeping track of multiple monthly payments and interest rates. Furthermore, that one payment will have a fixed interest rate that won’t change over the life of the loan, which is also good news.

 

Still, it’s not only about simplifying and clarifying your repayments. Consolidating can give you a motivating finish line to being debt-free, which is especially advantageous if you don’t have a debt payoff plan in place.

 

What about the cons?

 

There is always a possibility that you won’t qualify for a low rate. Balance transfer cards are often hard to qualify for. Usually, they require good to excellent credit.

 

Still, debt consolidation loans are more accessible. Besides, there are loans constructed for bad-credit applicants, but borrowers who have the highest scores typically receive the lowest rates.

 

Consider that if the lender can’t offer you a lower rate than your current debts, debt consolidation may not be a good idea for you. If that’s the case, you should consider another debt payoff strategy, such as the debt snowball and debt avalanche methods.

 

Fortunately, borrowers looking to consolidate with a loan can prequalify with some lenders if you want to see potential rates without affecting their credit scores.

 

The other disadvantage of debt consolidation is that you could fall behind on payments. That poses a serious problem, as missing payments toward the new debt may push you in a worse position than when you started.

 

Let’s say you couldn’t pay off your balance transfer card within the zero-interest promotional period. As a result, you’ll have to pay it at a higher APR. It may be even higher than the original debt.

 

Furthermore, if you fall behind on a consolidation loan, the missed payments will be reported to the credit bureaus, which would jeopardize your credit scores. You should make sure the new monthly payment fits comfortably in your budget before consolidating.

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