Is consolidating debts a good idea?
What is debt consolidation?
Debt consolidation is the process of consolidating multiple debt obligations into a new loan with a more favorable term structure, such as a reduced interest rate structure, a longer repayment period, and so on. The money from the new loan is utilized to pay off other debts in this case.
Why is it used?
Lenders like debt consolidation because it saves them money. Consolidating debt is common because it is often advantageous to customers. To get your financial house the debt consolidation loans, debt management programs, balance transfers and mortgage refinances should be mutually beneficial.
The pros of debt consolidation
You might be able to get a better deal.
The most effective part of debt consolidation is that it helps to lower the interest rate of your debt and which thereby saves your money.
If you pay $2,500 in interest over two years it includes a total of $9,000 debt with a 25% combined APR and a per month payment of $500.
If you choose a debt consolidation loan with an APR of 17% with a 2-year payback term, your new monthly payment would be $445, and you would lay by $820 in interest.
You could pay off the loan sooner with the money that you saved on the last payment.
If you meet the requirements for a balance transfer card, you will not be charged interest throughout the balance transfer period.
2. There is only one monthly payment.
Instead of looking forward to multiple monthly payments if there is only one month and its interest rates, there will be no change for consolidating the debt into one payment with a fixed interest rate.
But it's not just about making it easier to pay your bills. If there is no debt payoff strategy in place, refinancing might provide a clear and finish line to becoming debt-free.
3. Improve your credit score.
Before applying for a new version of credit, enquire about a credit, which can lower your score temporarily by a few points.
If you make your per month payments on time, the overall effect should be positive, especially for credit card debt.
Reducing and maintaining your ratio of credit usage and a fair credit score is one of the most important things you can do.
4. Take control of your situation and make a proactive plan to correct it
Taking control of your position and developing a proactive strategy to fix it provides you peace of mind, not to mention alleviates the burden of coordinating various payments with different due dates.
The Cons of debt consolidation
You might not be eligible for a cheap rate.
For a low transfer card, it will be hard to qualify and also require excellent credit.
The most safe and comfortable loans are debt consolidation. Borrowers with the best credit ratings usually get the best prices.
Debt consolidation is usually not a good choice unless the lender can provide you a cheaper rate than your current loans.Debt avalanche or debt snowball are the other debt strategies.
Borrowers who want to consolidate their debts with a loan can prequalify with some lenders to see what rates they would be offered without hurting their credit ratings.
2. You may get the payment at the right time.
If you miss payments on the new loan, you may find yourself in a worse situation than when you started.
If you miss to pay the balance of the transfer card within the period, then you will need to pay a higher APR.
If you default on a consolidation loan, you risk incurring late penalties and having your missed payments recorded to credit bureaus, damaging your credit scores.
Whenever a new payment month begins make sure that it is budgeted.
3. There are a few problems related to debt consolidation
Even Though consolidation is an effective tool it doesn't fix the recurring debt. And also it will not give any basic idea of the initial stage of debt.
You will face the problem of overspending.
If you have a lot of debt, you might be better off talking to a credit counselor at a respected nonprofit who can help you build up a debt management plan rather than trying to deal with it on your own.
4. May tempt you to add to your zero balance credit card debt
It can be tempting to start making new charges on your credit cards once you've cleaned the deck to a zero amount, which will increase your overall debt.
Needless to say, this new debt might seriously jeopardize your efforts to reclaim your financial footing.
To avoid this type of conduct, some people chop up their credit cards. Others have chosen to close their accounts.
