Are you thinking about debt consolidation? Before you make this decision, it is vital that you weigh the pros and cons. One great thing about debt consolidation is that you can bundle all of your debts into one loan, and this makes bill paying a little easier. On the other hand, your debt consolidation loan could come with a higher interest rate. With debt consolidation, you can improve your credit utilization score, which will improve your overall credit score. Your credit utilization is your ratio of debt to your credit limit, and when you no longer have multiple balances, you can have a better credit history. Here are additional pros and cons of debt consolidation.
Temptation to Get Back into Debt
One disadvantage of debt consolidation is the temptation to apply for and use up new credit. This is because once you pay down your debts through consolidation, you'll have a better credit score and more offers will come your way. You'll need to resist the temptation to open new accounts and instead use this new financial freedom for more meaningful goals such as homeownership, investing, or starting a business.
You Can Eliminate Variable Rates with Consolidation
With debt consolidation, you can have a new loan with a fixed interest rate rather than a variable rate that might change from time to time. When the interest rate is fixed, you'll have a more consistent monthly payment amount and this reduces the hassle of struggling to pay on the new loan.
Debt Consolidation Can Accelerate Your Repayment
Another benefit of debt consolidation is that you can accelerate your repayment plan. If you make consistent payments and even pay more than the required balance at times, you're on the fast track to becoming debt free. You'll need to stay focused on your goals and not be distracted by temporary desires that could derail you financially.
Those Origination Fees Will Hurt Your Wallet
In the long run, you will benefit from debt consolidation but when you set up the plan, you'll need to pay origination fees and other expenses. You want to budget for these costs when getting a consolidation loan.
Debt Consolidation Scams Abound
If you're not careful, you'll fall for a debt consolidation scam that appears to be legitimate. If a debt consolidation company requires you to pay money when they haven't completed services, it's a red flag. If the company is too aggressive in their marketing efforts, then you want to stay away from them. If the company asks you to avoid contact with creditors, this might be a scam.
False Illusion of Financial Freedom
With debt consolidation, you might experience the illusion of financial freedom. You might think that because you now only pay a single loan, that things are better for you. However, debt consolidation alone is not enough. You need to address the issues that got you in debt and make permanent changes that will keep you debt-free.
No More Missed Dates for Multiple Bills
When you consolidate your debt, you don't have to worry about paying multiple bills on different due dates. You will only have one due date for these bills, and you'll be more organized with your finances.
Monthly Payments Could Be Smaller
Another benefit of debt consolidation is that your monthly payments might be smaller. The loan will be spread out over a period of time, and you'll have more time to pay it off. This is a neat advantage if you have other debts such as a mortgage or a car payment.
In conclusion, you want to consider these points and ask yourself if debt consolidation is right for you. If you need assistance with financial planning, contact us. We are here to help you make the best financial choices for your future.