The debt consolidation loan can be a great way to pay down high interest debt but it may not be for everyone. Before you pull the trigger on one of these loans, let’s take a look at the good and bad things about them.
There are a lot of good things about a personal loan used for debt consolidation, probably more good than bad. Here are a few good things that this loan can do for you.
Pay Off High Interest Debt
Credit card debt is extremely hard to get rid of because of the very high interest rates. When you are making your monthly payments, a huge portion of this money will be going just to pay down the interest. Little of the money will go towards the actual principal, which is the way that the credit card companies like it.
If you have good credit, but are carrying a lot of debt, a consolidation loan can help you reduce the interest that you are paying. You should be able to easily cut your interest rate in half or even more. This could allow you to finally start making a debt in the total. It can take years off of the time that it takes to become debt free.
Raise Your Credit Score
Yes, a consolidation can really increase your credit score and here is how.
Do you know what happens when you consolidate all of those credit cards into one loan? They will immediately drop to a zero balance. This will lower your credit utilization and will likely result in an increase of your credit score. Credit utilization is responsible for almost a third of your score, so tit can have a significant impact.
If you have multiple credit cards that you are paying off with the consolidation, it can simplify bill time. You will be able to start making just one payment a month instead of the multiple payments you were making.
It might not be a huge time savings but it can be enough that you will notice the difference. Plus, if you are someone that finds it easy to miss a payment by mistake, it can help prevent that. It is much easier to just remember one payment.
Lower Your Monthly Bills
In most cases, your monthly consolidation loan payment will be less than the total of all your credit card payments. If you were paying 350 dollars a month in credit cards, it is likely to go down to 250 dollars.
This, of course, does not mean that you should make only the minimum payment on your loan, you should try to make a payment at least equivalent to what you were paying in total.
It does however, give you a lower required payment so that if you have a bad month or an unexpected expense, you can cut down your payment temporarily.
Like everything else in life, there is a bad side to everything. Here are some reasons why a consolidation loan might be a problem.
You Have Bad Credit
If you have bad credit, chances are good that you will not be able to get a consolidation loan that is lower than the interest you are paying on your cards currently.
In addition, bad credit loans often come with origination fees. This makes it possible for a consolidation loan to actually cost you money.
So, if your credit is bad, this type of loan may not be the right choice, even if you qualify.
You Have Low Willpower
If you have low willpower, something very bad could happen if you pay off those credit cards. You could end up with several thousand dollars of available credit.
You could get the urge to simply charge them up again. This would be a horrible thing because it would mean that you have charged up credit cards and a consolidation loan to deal with.
Of course, you could just simply cancel the credit cards after you pay them off but this would result in a reduction in your credit score. Close the accounts and your available credit would plummet. This will, in all likelihood, lower your score.
You Would Have To Get A Secured Loan
If your credit is very bad, you might need to get a secured loan in order to consolidate your debt. While this could be a solution, it could also be a problem, especially if you have not corrected the behavior that caused you to become in debt.
As it stands if you were to default on credit cards, they are unsecured. You could be sued but you would not face an immediate loss of property. If you take out a secured loan, you might face possible loss of property. This could be a risk that you do not want to take.
Tina’s Final Word
Consolidation loans are typically a good deal. They allow you to reduce the interest that you pay on debt and ultimately escape your debt prison much earlier than you otherwise would have.
If you have bad credit though, even if you qualify, the loan is probably not going to be worth the trouble and could easily cause you more harm than good. Change the pattern of spending first and work on improving your credit score. Then, you will have more options available to you that could help you reduce your debt completely.
If you have a problem with debt and/or making your monthly obligations, seek the help of consumer counseling. It may be available to you for free or at a reduced price from your city.