The Federal Reserve reported that the US consumer debt in the second quarter of 2021 had totaled more than 4.2 billion dollars.
Thus, you’re not alone if you currently struggle with your debts.
Furthermore, if you are searching for a method to help you effectively manage your debt and pay it off quickly, taking out a debt consolidation loan might be the answer.
Multiple Debts and Your Credit Score
It is crucial to know that having multiple debts doesn’t necessarily hurt your credit score.
However, there are factors you need to watch out for.
This includes not being able to manage your debts properly.
When you have multiple debts, the reality is that it tends to have different interest rates and repayment schedules.
Because of this, you also tend to forget and mismanage your debt repayments.
Once you miss a loan repayment, it is expected that your credit score will experience a negative impact, which can lead to limited loan options in the future.
Knowing what is an outstanding debt and how it affects your credit score is not enough; you’ll need to find an effective solution to eliminating your problem.
That’s where debt consolidation comes in.
Related: Credit Scores Are Easy to Raise: Reach Excellent
What Is a Debt Consolidation Loan?
A debt consolidation loan is when you turn multiple debts into a single loan that includes one monthly payment and, preferably, a lower interest rate.
In addition, taking out a debt consolidation loan makes your debts more manageable since you don’t have to worry about different monthly payments and due dates; this helps a lot in paying them off easier and faster.
It is essential to know that debt consolidation loans usually have a fixed interest rate.
This means that the interest rate of your loan from start to finish will remain the same.
Thus, if you have two credit cards with different minimum payments and interest rates, you could take advantage of a debt consolidation loan to pay them off, which leaves you with one monthly debt repayment instead of two.
A debt consolidation loan is considered a way to refinance your debt.
First, you’ll need to apply for a loan to cover your existing debts.
Once approved, you can then use the money to repay your debt balances.
After this, you can then start repaying your new loan during its set period.
Benefits of Debt Consolidation Loan
Getting a debt consolidation loan has several benefits you should consider:
#1. Save Money on Interest
A debt consolidation loan makes sense if it can offer you a lower interest rate than what you are currently paying with your existing debts.
This is why you can save money on interest.
#2. Pay Off Debt Fast
When getting a debt consolidation loan, the loan amount will be used to pay off your multiple existing debts.
This places you on a faster track in repaying them in full.
#3. Simplify Monthly Payments
As emphasized earlier, a debt consolidation loan can turn your many debts into one.
This means you only have to think of one payment and due date instead of multiple.
As a result, it simplifies your monthly payments and lessens your chances of missing payments, which can boost your credit score.
#4. Fixed Monthly Loan Repayments
Debt consolidation loans tend to be fixed installment loans.
This means that you’ll know when the life of the loan ends.
Drawbacks of Debt Consolidation Loan
Knowing the cons of taking out a debt consolidation loan is essential in making a firm decision that can affect your financial situation.
Here are the drawbacks of taking out a debt consolidation loan:
#1. Won’t Solve Financial Issues
Debt consolidation can help you make your debt repayments easier and pay them off quickly.
However, it can’t solve your financial issues, especially when you decide to have multiple debts again.
This can enlarge your overall debt, which makes it challenging to manage and can impact your credit score.
#2. Upfront Costs
It is crucial to know that some debt consolidation loans might come with fees.
Examples of these fees include prepayment penalties, balance transfer fees, annual fees, and many more.
Thus, before you get a debt consolidation loan, it would be best to ask the lender first about upfront costs.
#3. Pay More in Interest
When it comes to a debt consolidation loan, paying more interest can happen in two ways.
The first will depend on your loan amount, credit score, and debt-to-income ratio.
This usually happens when you can’t qualify for a lower interest rate.
On the other hand, the second one can happen if you use the debt consolidation loan to help lower your monthly payments, which is usually done by stretching the repayment timeline.
Unfortunately, this will likely make you pay more interest in the long run.
To Wrap It Up
A debt consolidation loan doesn’t only help you stay organized when it comes to your debts.
It also helps a lot in paying them off fast since you only have to pay your obligations in a single payment instead of multiple ones.
Furthermore, taking out a debt consolidation loan and making on-time payments can boost your credit score, which is an advantage if you decide to get a loan in the future.
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