Are you struggling with consumer debt? You are not alone. American consumers are stuck with a total of $14.35 trillion in consumer debt in the third quarter of 2020, according to the New York Federal Reserve.
If you are falling behind on your credit card payments, then you should consider debt consolidation. Let’s read on to see the pros and cons of debt consolidation to see if this is the best option for you.
What Is Debt Consolidation?
Debt consolidation is when you can pool all your debt together into one solid payment with one interest rate. This means that all your credit card payments, mortgage payments, car loans, and student loans are one now.
As you can imagine, this solution can be tempting to those falling behind on their payments, especially since you end up with a lower interest rate. Let’s look at some of the pros and cons of debt consolidation plan below.
Pros and Cons of Debt Consolidation
You must have heard the saying if something sounds too good to be true, it probably is. It’s the same way with debt consolidation.
Even though it is a great solution for many suffering from too much debt, there are both pros and cons to this debt consolidation plan. Let’s dig deeper.
Pro 1. You Get a Lower Interest Rate
If you have a good credit score, you can usually qualify for a lower interest rate which is a great bonus. This means that you pay one single amount into your loan every month at a lower interest rate.
For example, if you have $9000 in credit card debt and your interest rate is 25%, you will end up paying $2500 in interest over 2 years, if you pay $500 a month.
With a debt consolidation plan, you will pay $820 in interest, with a 17% interest rate and $445 per month in loan repayment.
As you can see, it reduces the amount you pay every month, because you are paying a lower interest rate. This is only if you can get this lower interest rate.
Pro 2. You Can Simplify Your Finances
With a debt consolidation plan, you can simplify your finances immensely as you only have one repayment plan, and one amount to pay every month with one interest rate.
If you had many different loans before, and you had to keep track of all their payments, due dates, and interest rates, you know how much of a hassle and headache it can be. No one has time for that!
Also, because your payment amount is the same every month, you know exactly how much to budget for. And how much you have for discretionary spending.
Pro 3. You Can Pay off Your Debt Sooner
Usually, with debt consolidation plans, you can pay off your debt sooner, because you can get a lower interest rate on all your consumer debt. The consolidation loan has a clear beginning and end to it.
With credit card payments, you could pay it throughout your lifetime. There’s no deadline there. As long as you are paying the minimum, you could be stuck with that credit card debt until you die.
Not so with consolidation loans. This is why they are such a great idea for anyone looking to control and boost their financial skills.
Pro 4. You Can Improve Your Credit Score
You can pay off your debt sooner with a debt consolidation plan. This boosts your credit score. Also, if you are diligent about paying your loan every month, then that boosts your credit score as well.
With consolidation loans, you HAVE to pay your payments on time every month. That’s an unbreakable rule.
As payment history accounts for 35% of your credit score, a debt consolidation plan helps you boost your credit score little by little every month.
Also, accounts owed count for 30% of your credit score, which will be enhanced greatly as you close out your credit cards, or loan accounts, when you merge them all into one debt consolidation plan.
Con 1. You Might Not Get a Lower Interest Rate
As iterated earlier, you need to have a good credit score to get a lower interest rate on your debt consolidation plan.
If you are having trouble paying off your loans on time, you might not have a great credit score, to begin with. Make sure you speak to the debt consolidation agency to figure out if this is a good solution for you or not.
Con 2. This Might Be a Bandaid Solution to Your Impulsive Spending Habits
If you are having trouble paying off your bills, because of your terrible spending habits, or because you have a hard time controlling your spending, then getting a debt consolidation plan is just a bandaid on that bigger issue.
It’s okay for you to get a debt consolidation plan, but only if you work upon your financial habits alongside the repayment plan. They should go along with each other.
Join a group of people who are on the same journey as you, perhaps on Facebook, and get serious about building good money habits!
This way you can pass on these habits over to your children as well, so they don’t end up repeating the cycle of bad finances.
Con 3. There Are Upfront Costs to Contend With
There are some upfront costs that you will have to budget for when signing up for a debt consolidation plan. These might include loan origination fees, balance transfer fees, closing costs, and annual fees.
If you don’t have the funds to pay for all these costs, then a debt consolidation plan might not be for you. Again, the best idea would be to speak with an agency that can help you decide your best course of action.
Financial Freedom Can Be Yours – with a Bit of Work
Now that you know the pros and cons of debt consolidation, you can make a more prudent judgment on whether this path is for you or not.
If you are still confused, then contact Alleviate Financial Solutions today. They have helped 20,000 families on the road to financial freedom and they can help you as well!