Is Debt Consolidation Right for You?
Debt consolidation means taking out a new loan which is enough to pay off your existing loans and debts. Once you receive the loan, you pay off your accounts, and make a single payment to pay off your debt. This technique particularly makes sense for those people who prefer to make a single payment every month.
Understanding Whether Debt Consolidation is For You
Just like a coin has two sides, debt consolidation has its positive and negative impacts as well. If the below positives and negatives could work for you, then take a look at DebtConsolidationLoans.com to know more. And take a look at a few of these impacts below:
- Consolidation of a Secured Loan
Secured loans carry lower rate of interest as compared to an unsecured loan. This may make the monthly payments lower and more affordable. Sometimes, these interest payments also provide tax benefits. A single monthly payment with a lower interest rate would help to ease your financial burden and carry less risk for the vendor.
- Consolidation of an Unsecured Loan
Consolidation of an unsecured loan ensures that no property is at risk. Although the interest rate might be higher, it might be comparatively less as compared to that charged on different credit cards. This will help to lower your interest burden and payments.
- Consolidated Installment Might be Less than the Original Installment
When you combine all of your debt into one single loan, it tends to reduce your monthly paid interest, thus saving money. Here’s an example: suppose you have 3 credit cards in your name with a monthly interest of 3% on each credit card. The total interest paid comes to 9% on all your loans. Now suppose the interest payment for a debt consolidation loan is 5%? It is now clear that debt consolidation can be a positive choice.
- Positively Affects your Credit Score
As you pay off several loan accounts with a single payment, credit agencies view this in a positive manner. Although your debt consolidation will appear as a new account, the other loan accounts will always be paid in full. This helps to positively affect your credit score.
- It Tends to Create More Debt
Debt consolidation could cause the illusion that a loan is being paid off. The ‘zero’ balance on their loan account statements serves as a green light for some consumers to go ahead and undertake more loans, leading to unplanned future financial contingencies. This only makes things worse.
- High Fees and Interest Rates Charged by Lending Companies
Several consolidation companies tend to charge higher professional fees and interest rates on consolidation loans. This tends to increase monthly payments to a great extent and you end up paying a large portion of your income on interest, and it is actually more difficult to pay off your debt.
- It Does Not Reduce Your Debt
Debt consolidation acts as a disguise. It does not actually reduce your debt but only replaces it with a different debt. Hence, it is not the proper solution for over-indebted consumers. A good solution here would be to spend less and save more. This savings could be used to pay off debts.
- A Lower Interest Rate Does Not Necessarily Mean Saving
Although the lower monthly interest payment gives you a certain amount of breathing space, you will be required to pay interest for a long period of time. This may lead to your interest payments adding up to very expensive debt over the years.
- Negative Effect on Your Credit Score
Your credit score tends to decline if you miss an interest payment on your debt consolidation loan. It is extremely important that you are fully committed to your debt consolidation payments in order to avoid a negative impact on your credit score. One way to overcome this could be to close recently opened credit accounts as the older ones tend to carry your credit history.
Deciding to take out a debt consolidation loan is never an easy decision. You must explore all of the available options before arriving at a conclusion. Research is the key. It helps you to understand what works best for you. In my opinion, debt consolidation is an expensive affair. If you want to get your finances back in order with the help of a debt consolidation loan, think twice before taking the plunge.