Are Debt Consolidation Loans A Good Idea – Written by Mia Taylor Written by Mia TaylorArrow Right Contributing Writer Mia Taylor is a contributing and award-winning journalist with two decades of experience working as a staff reporter or contributor for some of the nation’s leading newspapers and websites, including The Atlanta Journal – Constitution, San Diego Union-Tribune , TheStreet, MSN and Credit.com. Mia Taylor
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Are Debt Consolidation Loans A Good Idea
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Best Debt Consolidation Loans For Bad Credit (july 2023)
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Debt Consolidation Vs Personal Loans: What’s The Difference?
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Pros And Cons Of Debt Consolidation Loans
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U.S. consumer debt — including mortgages, auto loans, credit cards and student loans — reached $16.90 trillion in the fourth quarter of 2022, according to the Federal Reserve Bank of New York. That’s an increase of 2.4 percent, or $394 billion, from the third quarter of 2022, prompting many Americans to explore other strategies to manage mounting debt.
Some options for overcoming debt include working with creditors to settle debt, using a home equity line of credit, or getting a debt consolidation loan. Debt consolidation is the process of combining multiple debts into one new loan, sometimes with a lower interest rate.
Although it sounds like an ideal solution, there are both pros and cons to debt consolidation. It could simplify your finances and help you get out of debt faster, but the upfront costs can be high.
Getting A Debt Consolidation Loan With Bad Credit
Debt consolidation is combining two or more debts into one larger debt. Consumers often make this move with a significant amount of high-interest debt.
In addition to simplifying your finances, debt consolidation ideally provides the borrower with more favorable loan terms, such as a more competitive interest rate.
Debt consolidation is often the best way to get out of debt. Here are some of the main benefits that may apply.
Taking out a debt consolidation loan can help you pay it off faster, especially if you have significant credit card debt. Credit cards do not have a fixed period of time to pay off the balance, but a consolidation loan has fixed monthly payments with a clear beginning and end of the loan.
Survey: 48% Of People With Credit Card Debt Are Afraid To Consolidate
Take away: Paying off your debt faster means you’ll pay less interest overall. Additionally, the faster your debt is paid off, the sooner you can start putting more money toward other goals, such as an emergency or retirement fund.
When you consolidate all your debts, you no longer have to worry about multiple due dates each month because you only have one monthly payment. Plus, the payment is the same every month, so you know exactly how much money to save.
Take away: Since you’re using the loan funds to pay off other debts, debt consolidation can turn two or three payments into one. It can make budgeting easier and create fewer opportunities to miss payments.
As of June 2023, the average credit card rate is 20.51 percent. Meanwhile, the average personal loan rate is 11.06 percent. Of course, rates vary based on your credit score, loan amount, and loan term, but with a debt consolidation loan, you’ll likely get a lower interest rate than what you’re currently paying on your credit card.
What Is A Debt Consolidation Loan?
Take away: Debt consolidation loans for consumers with good to excellent credit typically have significantly lower interest rates than the average credit card.
If you use a personal loan to pay off your debt, you’ll know exactly how much is due each month and when your last payment will be. If you only pay the minimum on a high-interest credit card, it could take years to pay it off in full.
Takeaway: With a fixed payment schedule, your payment and interest rate stay the same throughout the life of the loan and there are no unexpected fluctuations in your monthly debt payment.
While a debt consolidation loan may lower your credit score slightly at first because you will have to go through a tough credit investigation, it will likely improve your score over time. This is because it will be easier to make payments on time. Your payment history accounts for 35 percent of your credit score, so paying one monthly bill when it’s due should boost your score significantly.
What Can A Personal Loan Be Used For?
Also, if any of your old debt was from credit cards and you keep your cards open, you’ll have a better credit utilization ratio and a stronger credit history. Amounts owed account for 30 percent of your credit score, while the length of your credit history accounts for 15 percent. These two categories can lower your score if you close the cards after paying them. Keep them open to help your credit score.
Take away: Debt consolidation can improve your credit score compared to not consolidating. This is especially true if you pay off your loan on time, as your payment history is the most important factor in calculating your score.
Debt consolidation does not guarantee that you will not go into debt again. If you’ve lived beyond your means in the past, you can do it again when you feel debt-free. To avoid this, create a realistic budget and stick to it. You should also start building an emergency fund that can be used to pay for financial surprises so you don’t have to rely on credit cards.
Take away: Consolidation can help you pay off debt, but it won’t eliminate underlying habits and behaviors. You can prevent debt from piling up by laying the foundation for a healthy financial future.
Debt Consolidation Loans: What You Need To Know
Before you take out a debt consolidation loan, ask about any fees, including late or early repayment fees. Depending on your lender, these fees can be in the hundreds, if not thousands
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