Between student loans, credit cards, and more, many Americans have managed to rack up thousands of dollars of debt. Regardless of how the debt has accrued, it must be paid, which is why many people who find themselves struggling to repay these debts turn to debt consolidation.
Debt consolidation can help people rid themselves of debt, but consumers who are considering this debt relief option should be sure they understand the pros and cons before taking this route.
Pros of Debt Consolidation
The pros of debt consolidation include:
- Increased credit limit: A debt consolidation loan ultimately increases one’s total credit limit which looks good on your credit report and may improve approval ratings for larger purchases (e.g. mortgages, and car loans.)
- One monthly payment: Debt consolidation reduces the number of monthly payments to one, making it easier for people to manage their debt.
- Debts are repaid sooner: Debt consolidation allows consumers to pay off their debt using a loan, so as soon as they receive the loan funds, they can pay back their debts.
- Low-interest rate: When compared to an interest rate on a credit card, the interest rate of a debt consolidation loan will likely make a debt a bit more affordable and save people money.
- Improve credit: Since consumers will have one affordable monthly payment to make, they will have a positive payment history reported to the credit bureaus, which will generally lead to a score increase.
Cons of Debt Consolidation
The cons of debt consolidation include:
- Fees: Many lenders will require borrowers to pay fees, such as application, origination, and late fees.
- Increase debt: If someone fails to pay off their debt with the debt consolidation loan, or continues to accrue debt on their open accounts, such as credit cards, they are simply adding to their debt rather than reducing it.
- Risk of losing assets: The debt consolidation loan may be a secured loan, which will require collateral. If the debt consolidation loan is not repaid, the borrower could lose their collateral.
What should be considered when applying for a debt consolidation loan?
When applying for a debt consolidation loan, there is a lot to consider. The goal is to get out of debt, so it is important for consumers to be realistic about whether or not a loan is a solution to their problem.
- Amount of debt
- Loan amount
- Fees
- Interest rate
- Repayment schedule
- Monthly payment amount
- Collateral
Once the above has been considered, consumers will want to make sure they can actually afford what they may be asked to pay their potential lenders every month. If affordability is an issue, debt consolidation may not be the best option because instead of relieving the person’s debt, it will only add to it.
Alternatives to Debt Consolidation
The goal of debt consolidation is to reduce debt. Although consumers may find debt consolidation appealing, it is not the only option consumers have when they want to lower their debt and become debt-free.
- Negotiate a settlement agreement: Negotiate with debt collectors to settle accounts for less than the balance due.
- Snowball method: Make small payments to clear away their smallest debts one at a time. Any additional funds can be used towards the balance due to get it paid down faster.
- Budget: Prioritize and eliminate expenses to free up extra cash that can be used to pay down balances.
- Bankruptcy: File bankruptcy to eliminate debt or repay the debt according to a specific plan.
With debt having a negative impact on a person’s life, it is easy to understand why people will try anything to get relief. Luckily, there are a number of ways for people to relieve their debt, and exploring these options will help them make an informed decision that will improve their financial situation. Depending on their circumstances, debt consolidation could be the perfect help for them to reach their goal of being debt-free.
