From credit cards, student loans to home loans, juggling between payments of different loans can be overwhelming. Thanks to debt consolidation, a good financial tool that is offering relief to individuals overwhelmed by multiple debts. By putting together these several loans into a single, larger one, you can easily simply repay and enjoy lower interest rates.
Jed Anthony Ariens says consolidating loans can also reduce the amount you pay monthly and improve financial payment. “But it has its drawbacks and it is not for everyone”, Jed Anthony Ariens adds. That is why Jed Anthony Ariens walks you through what debt consolidation is all about including its pros and cons to help you make informed decisions.
What is Debt Consolidation
Debt consolidation is a process that involves combining multiple debts into a single, larger loan. This can be beneficial if you’re struggling to manage multiple payments, high-interest rates, or simply want to simplify your financial life. While some debt relief companies offer specialised debt consolidation programs, there are also standard personal loans or balance transfer credit cards. Not only that,
How Does Debt Consolidation Work?
Debt consolidation works by taking out a new loan to pay off multiple existing debts. This new loan comes with a single, lower interest rate compared to the combined rates of your original debts. Here is how it works:
Assessment: You evaluate your debts, interest rates, and monthly payments.
New Loan: You secure a consolidation loan from a bank, credit union, or other lender.
Debt Payoff: The proceeds from the new loan are used to pay off your existing debts.
Single Payment: You now make one monthly payment to the new loan instead of multiple payments.
Pros
Here are what you stand to gain when you consolidate your multiple loans into one:
- It Simplifies Repayment: you do not have to stress on juggling between multiple payments anymore. There is only one payment due date each month, the chances of late or missed payment is avoided.
- It May Lower Interest Rate: you can benefit from an interest rate that is lower than the ones you are paying from the multiple debts. With this, you will be able to save hundreds to thousands of dollars.
- Debt Payoff Is Faster: you can repay debt faster by taking advantage of the lower interest rates.
- Improved Credit Score: Making consistent on-time payments on a consolidation loan can positively impact your credit score. However, you will have to use it responsibly and avoid new debts.
Cons
- It Can Extend Repayment Term: consolidation loans often have longer repayment terms in order to make repayment easier. With this, you might have to pay interest for a longer period, which can increase the total amount you pay back.
- Higher Overall Interest: While it seems lower interest rate is good enough reason to consolidate loans, you might end up paying higher interest rate in the longer run therefore, ensure the overall interest rate is lower than the existing loans before making decisions, Jed Anthony Ariens says.
- Ignoring the underlying issues: what’s the point of consolidating loans if you do not address the underlying reasons why you end up in debts in the first place. This could be something as simple as changing your lifestyles, curbing expenses and many more.
- Potential Fees: Some consolidation options involve paying upfront, balance transfer fees, or annual fees. This means you might end up not saving as much as you thought.
- Risk of New Debt: Consolidating debt can make you think you have more money to save than you have. If you continue to use credit cards or other forms of credit while consolidating, you might find yourself in a worse financial situation.
Is Debt Consolidation a Good Idea?
Jed Anthony Ariens says debt consolidation can be a good idea for some people, but not for everyone. It should be considered if you have:
- High-interest debt: If you have several high-interest debts, like credit card balances, consolidating them into a lower-interest loan can save you money.
- Difficulty managing multiple payments: Juggling multiple payments can be stressful while consolidating simplifies your finances.
- Good credit: A good credit score increases your chances of securing a lower interest rate on a consolidation loan.
Do not Consider Debt Consolidation if you have
- Low-interest debt: If most of your debt has low interest rates, consolidating might not make sense as it won’t save you much money.
- Underlying financial issues: If you’re not addressing the root cause of your debt and you are likely to rack up debts again, consolidating won’t be more of a benefit. ,
- Poor credit: A low credit score can limit your options and lead to higher interest rates on a consolidation loan.
Important Things to Consider Before Debt Consolidation
- Interest rates: Compare the interest rate on the consolidation loan to the rates on your current debts.
- Fees: Some consolidation options involve upfront or ongoing fees.
- Repayment terms: Consider the length of the new loan. A longer repayment term might mean paying more interest overall.
- Credit score impact: Consolidating debt can affect your credit score for a while, but you might be back on your feet with a good standing in a year or two.
Ultimately,
“The decision to consolidate debt is a personal one. You will need to carefully evaluate your financial situation and consider all potential challenges before making a decision,” Jed Anthony Ariens concludes.