U.S citizens have had to face a massive rise in inflation year by year. Naturally, this has put the burden on obtaining more loans, leading to spending half their lives paying off debts. So much so that most Americans think of other options to pay their debts quickly.

One of those options is debt consolidation . But as straightforward as it sounds, it’s not without pros and cons.

Pros of Debt Consolidation

  • Get Low-Interest Rates

    The average credit rate in March 2022 was around 16%. In comparison, the average rate for personal loans is 11%. Of course, it depends upon your credit card score and debt history, loan amount, and other factors. And yet, there’s a good ol’ chance that you’ll get low-interest rates with a debt consolidation loan compared to what you’re currently paying on your credit card.

  • Pay off Debts Sooner

    When you go for debt consolidation, your lender will designate a clear starting and ending point for the payment. Additionally, these payments will be based on monthly fixed amounts, giving you the timeframe after which you will become debt-free. On the other hand, credit card debts don’t have a fixed timeline to pay off a debt, which might increase the sense of security without you realizing where you’re headed.

  • Simplified Payment Procedure

    Since you don’t have to keep track of several debts (or deal with several debtors simultaneously), it automatically simplifies the payment process. That means you’ll have a single loan spread across your balance transfer or credit card to be held accountable for.

  • Boost Credit Score

    It might feel like debt consolidation lowers your credit score initially. But over time, you’ll experience a boosted credit score. This boost will emerge from the regular payments you make. Since your payment history makes up around 35% of your credit score, paying a bill on time will significantly increase the score.

Cons of Debt Consolidation

  • Might Not Lower Interest Rates

    A lower interest rate depends upon your credit score and credit report. If you have a bad credit history, it’s highly likely that you’ll receive a loan at a higher interest rate. As a result, you might have to pay more interest on a single loan than when you were previously paying for multiple loans.

  • Missed Payments Worsens Situations

    No matter the reason, one missed payment can create difficulties you might not have imagined. To start with, your lender will ask you to pay a late payment fee. Along with that, they’ll have to report the late payment to the credit bureaus. This can badly impact your credit score, further reducing your chances of getting a clean slate for future loans.

  • Doesn’t Solve Financial Issues

    Debt consolidation doesn’t guarantee that you won’t get into debt again. If you have a habit of living luxuriously or spending uncontrollably, debt consolidation can only do so much.

    The only thing you will get relief from is getting rid of the previous debts. However, you can turn the situation in your favor by:

    • Practicing self-control
    • Setting up an emergency fund
    • Making up a realistic budget
  • Comes with Up-front Costs

    While a debt consolidation loan offers you a lump sum of money to pay multiple debts, it’s not without costs. Without knowing, you might fall head along into a series of unfortunate fees to pay. These can be:

    • Loan origination fees
    • Loan origination fees
    • Closing fees
    • Annual fee
    • Late payment fees

    Based on your lender and credit score history, these fees can be hundreds of dollars, if not thousands. Therefore, it’s vital to read all you can learn about debt consolidation before applying for one.

Before You Leave…

Debt consolidation is a double-edged sword that you can turn in your favor in the right circumstances. These circumstances are easier to grasp when you know the what, how, when, and where of the process. In case you face challenges dealing with the complicated application procedure, you know where to look!

At Debt Free Life Inc, we put our heart and soul into leading you towards a life of financial freedom and wealth that you can fully call your own.