If you’re struggling with debt today, you wouldn’t be alone. The average American owes $96,371 this year, with the nation owing a collective tab of $16.5 trillion in household debt.
If you owe a lot of money across several financial institutions, you might consider a debt consolidation loan. This loan refinances your high-interest debt under one account, so you only have to make one payment each month.
Why Do People Consider Debt Consolidation?
Typically, when you apply for your next personal loan online, you do so with the intention to repay what you owe, including rates and fees, by the due date.
How much this costs you depends on your financial institution, your financial profile, and even the financial product itself. Short term personal loans can vary drastically.
As time goes by, and you take out other loans online, you can get in over your head. Before you know it, most of your paycheck is going towards your monthly debt payments. You might not even have enough leftover to put into an emergency fund, which can cause you to borrow again and owe more.
This is called a debt cycle, and it can be a dangerous one to fall into. Debt consolidation may help you put a stop to this cycle and free up your cash flow.
What Are the Pros of Consolidating Debts?
- Once you consolidate your debt, you won’t have to send money for each loan or line of credit individually. Instead, you’ll only have to make one payment to the financial institution that holds your consolidating personal loan.
- Generally speaking, these personal loans have a lower interest rate than other high-interest accounts, like cash advances. This means you’ll pay a lower rate for your outstanding balance than you would on a cash advances.
- The typical consolidating personal loan comes with fixed payments and a fixed due date. This means you’ll know how much you owe each month. But more importantly, you’ll know when you’ll pay off your debt, provided you meet every minimum payment.
What Are the Cons of Consolidating Debts?
- While it may be helpful in some situations, consolidating isn’t a perfect solution for everyone. You still will owe every dollar you borrowed through the original short term personal loans or lines of credit. You may still have to make a large payment towards your consolidated debt each month, so it might still be unaffordable.
- While most consolidating options offer lower rates, it’s not a rule across the board. You might qualify for a higher rate than you expect because of your credit score or debt-to-income ratio. Your outstanding debt may also increase your rate, so you’ll need to crunch the numbers to find out if it makes a difference.
- Consolidating might cost more than just your loan principal, interest, and finance charges. Some financial institutions may charge annual fees, origination fees, early payment penalties, closing fees, and more. Don’t forget, late penalties and extra interest will also apply if you miss any payments.
While consolidating debt might be convenient, it’s not a fix-all for your financial situation. Weigh the pros and cons before you make a big decision like this.
