Can you benefit from a debt consolidation loan? Is a debt consolidation loan suitable for you and your finances?
As always, it depends. There are pros and cons to debt consolidation loans, and they can be a perfect tool to help you get your financial life on track. Read below to see more about debt consolidation loans.
What is a Debt Consolidation Loan?
A debt consolidation loan is a new loan that you take out to cover the balance of your other loans. A debt consolidation loan is a single, more significant piece of debt, usually with better payoff terms than your original, smaller debts. When you receive a consolidation loan, your other loan balances are paid off. This payoff allows you to make one monthly payment rather than multiple.
For example, if you had one student loan for each semester of your four-year college degree, then you’d have taken out eight loans. This amount of loans can be cumbersome to manage, so you could take out a debt consolidation loan to pay off all your eight loans and only make one monthly payment instead.
Should I Get A Debt Consolidation Loan?
If you’re in a pinch and need to consolidate your loans to make them more manageable, then your best option may be to get a personal loan or a debt consolidation loan.
Pros
There are plenty of benefits of a debt consolidation loan. Some of them are:
- Simplified finances. When you consolidate your debt, you will pay off multiple debts and only have one loan. This means you’ll make one monthly payment instead of numerous to keep track of all the time.
- Lower interest rates. If you have many credit cards or other high-interest debt, the interest rates might vary and be high. Personal loans typically have lower interest rates depending on your credit score, the loan amount, and term length.
- You have a fixed repayment schedule. Instead of having multiple payments each month that vary by amount, interest rate, and term, you will have a fixed schedule each month.
- Boost your credit. By eliminating the risk of forgetting to make payments or letting your loans get away from you, paying a set amount on a consolidated loan can help you to boost your credit score.
Cons
Debt consolidation isn’t for everyone. Be sure that you understand the risks you take on as well. Some of the things to watch out for include:
- Upfront costs. Some personal loans have upfront fees, including an origination fee, closing costs, or annual fees. If you pay a lot of fees over time, it might not be beneficial to consolidate your loans.
- Higher interest rates. If you have poor credit, you will not get a favorable interest rate on your consolidated loan. Therefore, you may have a higher interest rate on your consolidated loan than on your existing loans. If this is the case, it likely will not make sense to consolidate.
The Bottom Line
A debt consolidation loan can be an excellent idea if you have many loans due to many different creditors. If you have trouble keeping track of your debts and payments, then you absolutely should consider getting one. It consolidates all your loans and payments and will make your life a lot easier and less complicated. However, if you only have one large loan, then debt consolidation may not be for you.
As always, this is not financial advice and absolutely should not be construed as such.
Robyn Goldfarb
Hi! I am a millennial mom with a passion for personal finance. I have always been “into” personal finance but got inspired to start my blog after a period of extended unemployment. That experience really changed the way I viewed my relationship with money and the importance of accessible personal finance education.