If you have a lot of outstanding loans, credit cards, etc., you’re probably wondering if debt consolidation is worth it. We’ll help you figure that out by showing you the specific factors that determine if consolidating debt is right for you.
Debt Consolidation Benefits
Debt consolidation involves combining your existing debts and paying them off via another form of debt, such as a personal loan or a balance transfer credit card. While it may not sound that great on the surface since you’re taking out another form of debt to pay another, debt consolidation could help you:
- Simplify your finances by decreasing the number of interest rates and payments you have to worry about.
- Decrease the chances of missed or late payments that ruin your credit since everything is streamlined.
- Get a clearer picture of when you can finally pay off your debts.
- Enjoy a lower interest rate than what you currently pay to save cash over time.
- Reduce your monthly payment.
- Pay off your debt earlier by using what you save on interest rates to make extra payments.
- Boost your credit by significantly paying down multiple debts at once, which reduces your credit utilization rate. And you can also boost your credit by simply making on-time payments towards your new consolidation loan or credit card.
Debt Consolidation Disadvantages
Debt consolidation has plenty of benefits, but it does have its downsides as well, such as:
- Depending on the lender, you could incur added costs that add to your debt, such as balance transfer fees, origination fees, annual fees, or closing costs.
- If your credit score is low, you may not be able to qualify for a low-interest debt consolidation loan. Get a loan with a higher interest rate than what you are paying, and you won’t be saving much.
- You may end up paying more interest in the long term if you choose a longer term for your debt consolidation loan and only pay the minimum each month.
- If you typically have trouble making on-time payments for bills, loans, credit cards, etc., missing a payment on your debt consolidation loan could ruin your credit even more.
- You may get a false sense of security by paying off debt with your new loan or credit card. And if you have issues overspending, this may give you the green light to spend even more and incur more debt, putting yourself in a bigger financial hole than before.
Is Debt Consolidation Right For You?
As you can see, debt consolidation has its pluses and minuses. Who does it work best for? Someone who:
- Has a lot of debt that they will not be able to pay off on their own within a year.
- Feels overwhelmed by all of their outstanding loans, credit cards, etc.
- Makes enough income to make the monthly payment on the new debt consolidation loan or balance transfer credit card.
- Can get a lower interest rate on the new loan or credit card than what they are currently paying.
- Won’t use debt consolidation as a green light to spend more and go into deeper debt.