When you go for a new loan in order to pay off multiple debts or credit card balances, the new loan is called a debt consolidation loan. Usually, debt consolidation loan is considered ideal, especially if you have balances on multiple credit cards since you will be paying off the high-interest credit card bills. Taking care of debts having high-interest charges is a good step towards consolidating your financial position and improving your credit score. However, depending upon the lending institution, which has provided you with the debt consolidation loan, you may end up paying a much higher interest rate over the course of the loan.
Typically people who have balances to be paid on multiple credit cards or students having multiple student loans go for debt consolidation. In fact, there are several lending institutions catering to students to help consolidate their loans. However, it is always best to do your research and select one of the best companies to consolidate and refinance student loans to avoid falling into a debt trap.
Following are certain advantages as well as disadvantages of opting for debt consolidation for multiple loans or credit cards.
Advantages of Debt Consolidation.
- Reduction in Interest Rate
If you happen to do proper negotiations with creditors you can get effectively reduce your overall interest rate by opting for debt consolidation loan. In a debt consolidation loan, restructuring of the payments is done to help you take care of your debts in a much better fashion.
- Single Monthly Installment
Since you will be consolidating all your debts, you require paying only a single installment each month. This is, undoubtedly, easy as compared to keeping track of multiple payments that you needed to do each month prior to opting for debt consolidation loan. Moreover, you obtain a proper debt repayment plan with a debt consolidation loan. Since interest rates are comparatively reduced a big financial burden goes off your head giving you the much-needed sigh of relief.
Also, a single monthly installment towards repaying your debt helps you to save considerable bucks and manage your finances better.
- No Delay in Paying off your Debt
When you have multiple loan accounts and credit cards running, you can easily fall short of making the monthly payment on time. Once or twice, a delay is fine but delaying each and every time can negatively affect your credit score destroying your ability to get a future line of credit debilitating your financial condition further. However, in the case of a debt consolidation loan you have to take care of only a single monthly installment. Hence, there is no scope of delay or late fees provided you don’t default on the monthly repayment amount.
- No Harassment from Creditors
If you have ever failed to make a credit card payment on time, you must have received a call from the credit card agency asking you to pay the same on an immediate basis. The more you delay more the seriousness of the person associated with the credit card agency increases and they might turn unruly or turn up to collection agencies which usually send officials to make you pay the amount.
This experience is extremely frustrating and embarrassing. When you opt for a debt consolidation loan, you clear all your debts and are responsible to pay only a single monthly installment for the institution which consolidated your debt amount. Hence, you don’t have to face any harassment calls from creditors as you don’t owe them anything.
- Improve your Credit Score
When every financial transaction becomes streamlined, thanks to the debt consolidation loan, you neither default on your payments and never have to face the issue of late payments again. This means that, gradually, your credit score starts improving which might have been negatively affected due to all the defaults and late payments that you made prior to opting for debt consolidation loan.
- Reduction of Stress
This is, undoubtedly, one of the best benefits of opting for a debt consolidation loan. When your financial condition becomes streamlined, as you have paid all of your debts, you get rid of a tremendous amount of financial burden which you were carrying on your head for so long. Hence, the amount of stress you might be facing drastically reduces allowing you to focus on other areas of life and concentrate on your personal development. You can now concentrate on what matters the most in your life.
Disadvantages of Debt Consolidation.
- Difficult to get
If you are aiming for an unsecured debt consolidation loan, it might be difficult for you to obtain, if your credit score is already running bad. Majority of the persons who apply for debt consolidation loan don’t qualify and their applications, generally, get rejected. On the other hand, if you opt for a secured debt consolidation loan, by pledging any of your property as collateral, you might end up losing your property if you happen to fail to take care of the monthly repayments of the debt consolidation loan.
- Psychological Impact
Well! The reduction of stress could have a negative impact too if you don’t keep control of yourself. Once you become free of debt you might end up spending more and incur additional debt on your head before you have even paid off your debt consolidation loan amount.
The advantages of a debt consolidation loan are certainly more than the disadvantages. The disadvantages play their part only if you happen to lose control of your psychological self and put up extra debt on your head before the course of repayment of the debt consolidation loan is over. This additional debt could make you miss on the monthly repayments of the consolidated loan and you can land again in the same situation in which you were there prior to taking the consolidation loan. So, if you can keep control of yourself, going for debt consolidation is, undoubtedly, a great idea. However, do your research and select a lending institution which offers you the lowest interest rate.