A debt consolidation loan is considered a personal loan that can be used to repay high-interest debts. Most of the time, it is used to pay off credit card debts. Consolidating your debts can help you combine multiple debts into one account, making your repayment plan simpler.
When Choosing A Debt Consolidation Loan Might Work For You?
You can take out a personal loan for almost any reason. However, if you are planning to get a debt consolidation loan, it is vital to consider the following:
- You have a good credit score.
Lenders offer personal loans to people across the credit spectrum. However, if you want to snag a personal loan with a low interest rate and favorable terms, you will most likely need a good credit score. It typically starts at a FICO Score of 670.
- You have high-interest debt.
According to Experian, the average interest rate of a personal loan is 9.41%. However, when it comes to credit cards, the average interest rate is around 16%. If you can get a lower interest than what you are currently paying, consolidating your debt can help you save cash on those interest charges.
- You have a repayment plan.
Since a credit card is a revolving credit, it lets you borrow and repay money on an ongoing basis. Because of this, there is no set repayment plan for you to work with. On the other hand, personal loans have a set repayment plan. They can be a great help if you want to manage your debts easily.
When Might Choosing A Debt Consolidation Loan Not Work For You?
Debt consolidation loans carry some benefits. However, there are instances where getting this type of loan might not be the best fit:
- You have no plans to change your spending habits.
Getting a debt consolidation loan might be appealing for you as it takes out available credit on your credit card. However, if you transfer the debt and take more loans on those credit cards, you will be in a worse financial situation. So, it will help if you fix potential spending issues before deciding to take out a loan.
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- You currently have a fair or poor credit score.
It is possible to get approved for a personal loan when you have a bad credit score. However, you will typically have to go with a high interest rate. This could increase your overall loan cost and might also make your monthly loan repayments unaffordable.
- You only have a few debts.
If you think you can repay your credit card balances in 6 to 12 months, the savings you can get from a debt consolidation loan might not be worth the comparison, research, and application process.
Pros and Cons of Debt Consolidation Loans
Just like any other funding option, taking out a debt consolidation loan has its pros and cons.
The following are some of the key benefits of taking out a debt consolidation loan:
- Repay Your Debts Sooner
Taking out a debt consolidation loan can place you on a faster track to repaying your debts. Unlike credit cards, a debt consolidation loan has a fixed payment schedule that gives you a clear understanding of your debt.
- Simplify Your Finances
When it comes to debt consolidation loans, you don’t need to worry about multiple due dates every month because this type of loan has only one repayment schedule.
- Lower Interest Rates
Interest rates tend to vary on many factors. However, you will most likely get a lower interest rate when taking out a debt consolidation loan as compared to a credit card.
Below are the disadvantages of a debt consolidation loan:
- There Might Be Upfront Costs
Some debt consolidation loans tend to come with fees. It is best to ask your lender about fees and other costs before you plan to get any loan. Additional costs include the following:
- Origination fees;
- Closing costs;
- Balance transfer fees;
- Annual fees.
- You Might Pay Higher Rates
A debt consolidation loan can also come with a higher rate than what you are currently paying. Credit Ninja suggests finding a trustworthy lender that can help you out with this financial situation. That way, you can get a debt consolidation loan with a lower interest rate than your other debts.
To know if debt consolidation is suitable for you, it is best to consider your current financial situation and financial goals. If you believe that you will save money and repay debts sooner by taking out a debt consolidation loan, then get one. However, if you think you can handle your debts on your own and a debt consolidation loan will probably cost you more, it is best not to take one.