Pros and Cons of Debt Consolidation Loan

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On average, Americans have over $ 90,000 in personal debt on all kinds of accounts – credit cards, mortgages, personal loans, student loans, vehicles and more. It goes without saying that updating all of these different accounts can be logistically difficult, not to mention the high cost, as different accounts accumulate various interest charges.

This makes a debt consolidation loan a tempting choice as this solution aims to minimize the number of bills you have to pay each month and reduce the amount of interest you end up paying over time. Every debt elimination strategy has its pros and cons, and consolidation is certainly no exception.

Here are the main Pros and Cons of Debt Consolidation Loan to keep in mind as you learn more about this approach.

Advantage: you could save money

Many people are motivated to explore consolidation because it could save them money. Borrowers with good credit who qualify for a relatively low interest consolidation loan can use it to pay off higher interest debt, such as credit cards. For example, if you can claim an 8% APR personal loan and use it to clear credit cards ranging from 18-22% APR, you will likely save money – although you still have to calculate it for yourself. insurance, fee factoring and other considerations.

Advantage: Paying invoices just got easier

Would you rather pay off one fixed loan each month or five revolving credit card accounts? It sounds like a trick question because the answer is so obvious. A major benefit of consolidating debt through a loan is that you only have to make one loan payment each month. Since this is the same amount month after month, it also makes it easier to budget for this expense.

Pro: You could pay off your debts faster

Have you ever felt like you were spending money on your credit card debt while barely making a dent? This cycle of revolving debt can feel like you’re going up an escalator going down – you end up staying put no matter how hard you put it.

Debt consolidation loans offer a firm repayment date and the fixed monthly payments needed to make it happen. This makes it easier to track progress and, again, to include this expense in your household budget.

Pros: Making payments can help you build your credit

Making regular and timely payments on a loan over time makes you appear more responsible in the eyes of lenders, which can increase your score. here is a pro tip of Money crashes: Keep your credit card accounts open even after paying off balances to avoid skyrocketing your credit usage rate, which can hurt your score.

Downside: you can’t save money

As we mentioned above, lenders look at your credit history, income, and other factors when they set the APR for your loan. There is no guarantee that you will qualify for a rate low enough to save money. What you can do is plug in your loan amount, loan term, interest rate, etc. in a consolidation calculator to determine if and how much you will save money.

Disadvantage: Secured loans put your assets at risk

One way to get lower interest rates is to secure an asset against the loan. To be aware If you end up missing payments or defaulting, the lender can seize any asset that you have attached as collateral.

Disadvantage: You might be tempted to take on more debt

A major temptation after paying off credit cards – loan or no loan – is to increase balances again. Avoiding this temptation means committing to your budget and controlling your expenses throughout the loan repayment period.

Weighing the advantages of using a debt consolidation loan against the disadvantages will help you make the best decision for your needs and avoid unpleasant surprises along the way.

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