One of the biggest problems that almost every American faces is consumer debt. Consumer debt includes: car loans, mortgages, credit card debt, and\or student loans. (Sounds familiar? Are you unfortunately one of the people who suffer from consumer debt?) It makes sense that gradually paying off your mountain of debt could overwhelm you. There is also the possibility that your financial situation cannot support a gradual pay-off of your debt. Many Americans look for alternative options to improve their debt, especially if they cannot pay their debt right away. One of those alternative options is debt consolidation. This article will tell you all about debt consolidation and its features.
What is Debt Consolidation?
Debt consolidation is the combination of multiple debts and transforming it into one single ball of debt. People take this option, if they have a significant amount of debt with a high-interest rate. According to Katie Ross, executive vice president of the non-profit American Consumer Credit Counseling, debt consolidation loans are “often used to combine credit card debts, auto loans, student loans, medical debt or other types of loans into a new loan…then the borrower only has to pay one monthly payment instead of a separate payment for each debt.” Debt consolidation loans simplify your finances, since you only have to repay your debt to one source. (You do not need to run around and repay your debt in several places anymore.)
Benefit #1: You Can Repay Your Debt With a Lower Interest Rate
With a debt consolidation loan, you will be able to repay your debt at a faster pace. If you have credit card debt, then debt consolidation loans will be significantly helpful. Credit card loans do not have a fixed schedule to pay off, which means that you have the option of constantly spending and paying off your credit card in a loop. On the other hand, debt consolidation loans have fixed payments each month, which determines the start and end of your loan timeline. This will help you keep track of your debt and pay at a fixed pace. Also, repaying your debt at a faster pace means that you will pay less interest. Once you finish paying off your debt, you can use that money for a retirement fund or an emergency fund.
Benefit #2: Your Finances Will Get Simpler
A debt consolidation loan will ease your mind; you will not need to worry about multiple deadlines each month to pay off your debt. With a debt consolidation loan, you will make one payment for your debt. Also, the payment you make each month to your debt consolidation loan is the same amount. The amount does not change, no matter the circumstances. This means that you can organize your budget and include the payment for the debt consolidation loan. Also, you will know how much money you need to keep paying off the debt consolidation loan each month. A debt consolidation loan will simplify your financial situation and you will know how much money goes to your debt.
Benefit #3: You Could Get Lower Interest Rates
According to Bankrate, the average credit card rate is approximately 16 percent in 2021. On the other hand, you will find that the average rate for personal loans falls below 11 percent. The interest rate of your loan depends on your credit score, how much you borrowed, and the timeline of your loan. However, there is a bigger chance that you will get a lower interest rate with a debt consolidation loan instead of paying with your credit card. If you have good credit, then you should consider a debt consolidation loan. This loan could provide lower interest rates, which is always a huge help.
Benefit #4: You Will Have a Fixed Repayment Schedule
As mentioned above, a debt consolidation loan will provide a fixed repayment schedule. This means that the amount to repay your debt and the interest rate stay the same for the rest of the debt consolidation loans lifetime. You will not find that there is an unexpected change in your monthly payments. Additionally, you will not have to run around and keep track of multiple deadlines each month. You will only make one payment each month to pay off your debt.
Drawback #1: Up-front Costs are a Possibility
Unfortunately, there are some fees that are associated with debt consolidation loans. These fees include: annual fees, closing costs, balance transfer fees, and loan origination fees. (It cannot only be good; there has to be some bad stuff too.) Before you decide on a debt consolidation loan, you should do your research and ask about all fees. This includes late payment fees or early payment fees. You never know where these fees could turn up, so it is best to be prepared.
Drawback #2: Higher Interest Rate
There is a possibility that your debt consolidation loan could come at a higher rate than the rate of your current rate. You receive an interest rate based on your credit rating, which is why you might face a higher interest rate. It all depends on your current credit score and credit rating. A debt consolidation loan does not guarantee a lower interest rate. If your credit score is not that great, then you should expect a higher interest rate.
Drawback #3: Missing a Payment Could Mean Trouble
Missing a payment for your debt consolidation could lead to a lot of trouble. If you miss one of your monthly payments, then you will probably need to pay a late payment fee. Keep in mind that if you pay less than the minimum, you will need to pay a returned payment fee. Additionally, your credit score could take a huge hit, if you miss a monthly payment for your debt consolidation loan. This will make it significantly harder for you to get a future loan or a good interest rate. To avoid all of these issues, you should enroll in the automated payment plan of the lender. Just make sure that the lender has one. (If not, then you should mark your calendar each month.)
Overall, you should consider a debt consolidation loan. But, make sure that your financial situation will improve with this type of debt. If there is a possibility that a debt consolidation loan will hurt your financial situation or you do not have the best credit score, then maybe a debt consolidation loan is not the best answer for you. You should ask your local bank or credit union on the best options for repaying your debt.