Juggling between student loans, auto loans, credit card debt, and other types of loans can significantly impact your finances. Talking about credit card debt, there are several credit card settlement companies that can help you manage and settle your debt efficiently. The bigger challenge is keeping track of all these loans, which may lead to missed payments. Debt consolidation entails merging all debts into one by taking a new loan with a lower interest rate. You can achieve more financial freedom with only one loan to pay off. However, before applying for debt consolidation, it’s crucial to determine if this is a smart move. Like all other financial decisions, debt consolidation has its fair share of pros and cons.
Pros of Debt Consolidation
1. It Can Lower Interest Rates
The problem with having many loans is that some can have an extremely high-interest rate. Thanks to debt consolidation, you can get a new loan with a much lower interest rate. In the long run, you can save much money on high interests that would have been paid off elsewhere. MoneySmart can link you with the best debt consolidation loans in HK with incredibly low APRs if you want to consolidate debts and pay a lower interest rate. With the help of this financial adviser, you can access debt consolidation loans with fast transfers and flexible repayment periods.
To qualify for lower rates, however, your credit score has to be improved during the period when you were repaying the other loans.
2. Debt Consolidation Can Put Your Finances on Track
Now that you will only be servicing one loan, it will be easier to remember when paying your installments. There won’t be late or missed payments. Through debt consolidation, you can put your finances on track. You will feel less burden on your shoulders.
3. You Can Get Out of Debt Sooner
When you get a debt consolidation loan with a lower interest rate, you can use your savings to make extra payments. As a result, you can get out of debt sooner than anticipated. If you have always wanted to lead a debt-free lifestyle, debt consolidation provides you with this opportunity. It’s important to know that this loan often has a more extended repayment period.
4. It Can Lower the Monthly Payments
With a new loan, payments that would be made in the future can be extended. As a result, the amount of money you initially paid to monthly debts can reduce. This, coupled with lower interest rates, can significantly reduce your monthly payment. Even though low monthly payments translate to longer repayment durations, you won’t spend all your salary paying off loans. You can channel some of your income to food, transport and other expenses.
5. Debt Consolidation Can Improve Credit Score
When you take a new loan, there may be some impact on your credit score. However, when the funds are used to pay off other pending loans. That will reflect on your credit report. Also, your score will gradually improve if you consistently make on-time payments on your new loan.
Cons of Debt Consolidation
1. Brace for Additional Costs
Certain fees will be incurred when you take a new loan to consolidate outstanding debts. Examples include; annual fees, balance transfer fees and origination fees. It would be best if you inquired about all additional costs from the lender.
2. It Requires a Good Credit Score
It’s better to consider consolidating your debts if you have a good credit score. That’s the only way you can be assured of low-interest rates. If your score isn’t excellent, the rates can even be higher than what you currently pay. Thoroughly scrutinise the interest rates before making a decision.
3. Debt Consolidation Can Create the Wrong Illusion
As beneficial as consolidating your debts can be, it can create the illusion that you have more money. Since you have lower monthly payments at low-interest rates, you may increase your monthly expenditure, which can lead to significant issues in the future. Borrowers must understand that debt consolidation doesn’t take away all your debts. It only merges them into one. Your goal should be to eliminate any debts you may have in the shortest time possible.
Instances When Debt Consolidation is ideal;
• When you have a good credit score, that can help you qualify for a low-interest rate.
• When you are assured of consistent cash flow for a certain period.
• When you have several outstanding loans with varying rates.
• Finally, when the monthly payments don’t exceed more than 50% of your gross income.
For most people, debt consolidation is often an absolute choice. By compiling all loans into one, consolidating your debts allows you to pay on time and control expenditure. Although it has its many perks, borrowers should also be aware of the drawbacks as well.