The Positives and Negatives of Debt Consolidation

Debt Consolidation on chalkboard

Debt consolidation is a viable option for those who have multiple credit cards and other types of debt who want to combine their payments into one, monthly payment that typically has a lower interest rate. By combining two or more debt payments into a single debt payment, consumers can reduce their financial burden through lower interest rates and also simplify how they pay off their debt. While this may sound like a perfect solution, it’s important to understand both the pros and cons of debt consolidation.

Benefits of Debt Consolidation

Debt consolidation can be a good way for people to efficiently get out of debt. Here are some of the benefits of debt consolidation. 

Pay off debt faster — Debt consolidation may help you repay debt more quickly, especially for those who carry credit card debt. Using a personal loan for debt consolidation means you will be following a strict schedule where the payment amount is fixed and payment is due at the same time each month. This may naturally impel you to pay off your debt faster. Alternatively, trying to pay off high-interest credit cards based on the minimum payments could take years for repayment to be complete.  

Simplify finances — Consolidating debt enables you to combine all payments into one monthly payment, meaning you no longer have to juggle several different due dates each month. The simplicity of a single debt can help ensure you don’t miss a payment resulting in additional late fees or penalties.

Better interest rates — In many cases, a debt consolidation loan can offer better interest rates, especially over credit cards. While the average interest rate for credit cards is 14.58%, the average interest rate for personal loans is 11.84%. While these can vary based on credit score, personal loans generally offer better rates than what you might be paying on your other debt.

Drawbacks of Debt Consolidation

It’s not all sunshine and rainbows; there can be downsides to debt consolidation. Consider the following when taking out a personal loan for debt consolidation.

Not a guarantee — Debt consolidation is not a “get out of debt free” card. Sometimes, the same habits that got a person into debt can keep them in debt if the root issue is not addressed. The best bet is to make a realistic, sustainable budget. Setting up an emergency fund is another helpful tool to keep debt at bay. 

Upfront fees — Some personal loans used for debt consolidation are accompanied by fees, including origination fees, annual fees, balance transfer fees, and closing costs. It’s important to ask about any fees upfront, including any penalties for late payments or early repayments. 

Higher rates possible  — While many debt consolidation loans come with favorable terms, your loan may be offered at a higher rate than what you’re currently paying. Be sure to fully understand your debt consolidation loan terms and interest rate before moving forward.

No matter what your current circumstances, always look at both sides of the equation when considering a personal loan for debt consolidation.

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