Should you consolidate your debt? If you have been thinking about it and you just received a “too good to be true” loan offer in the mail from Hornet Partners, Polk Partners, Ladder Advisors, Credit9, Cambridge National Lending, Greenlink Financial, Americor Funding, or Titan Consulting Group – listen to your gut instinct. Do you really think you qualify for a 3.99% interest rate? Do you really think that reservation code is especially for you? Check Best 2020 Debt Reviews and find out the truth.
According to Federal Reserve data, an average American carries $5,284 in credit card debt. The number increases to $7,527 for debtors who carry a balance. Often, people who struggle with many loans wonder: can debt consolidation relieve my financial burden?
Debt consolidation rolls several high-interest loans into a single debt with a low interest. Provided the right circumstances, it can be quite effective in paying off your debt in a short period. So, is it good enough for you? Let’s find out.
What Are the Advantages of Debt Consolidation?
There are numerous benefits of debt consolidation, and for many people, they outweigh the cons.
Easy to Manage Deadlines
When you consolidate debt, it reorganizes your loan into one regular payment. Rather than keeping tabs on several loans at once—vehicle repair costs, rental payments, car loan payments, and credit card payments—you can track a single debt and manage it more efficiently.
Avoid Steeper Interest Rates
The major dilemma with managing several smaller debt is that interests add up on a monthly basis. Personal loan rates can go as high as 30% p.a. whereas credit card rates can spike to 25%. Things can take a turn for the worse if you miss a payment, causing you to pay compounded interest for the next month. The best way to consolidate credit card debt is to obtain convenience in the form of a single, lower interest rate.
No Collateral Repossession
One of the most feasible methods to get a low-interest loan is to use your asset as collateral. Such a strategy is effective because it pays off your total debt quickly. But, complications can arise if you experience difficulties with your finances all of a sudden. As a consequence, debt collectors may pursue you continuously, and your asset can be lost forever. On the other hand, a debt consolidation loan can help you get favorable rates without risking your valuable assets.
Improve Credit Score
Maintain your regular payments to create a positive impact on your credit score. Conversely, missed and late payments are a recipe for disaster and can bring down your credit score. A poor credit score not only makes it harder to secure a loan, but it also prevents you from getting an affordable interest rate.
What Are the Disadvantages of Debt Consolidation?
Despite their pros, there are some downsides to consolidating debt:
Increases the Debt Term
Consolidate your debt to reduce your monthly payments by extending your payment period. It can stabilize your financial affairs but at a certain expense. In some cases, the sum of all your payments can be considerably higher than other loans. This cost becomes higher after paying a lot of interest charges over a long period.
Doesn’t Bail Out Subprime Borrowers
Borrowers with a poor credit score are in for a rough ride. They cannot take advantage of debt consolidation because of difficulties in obtaining a loan with low interests and different finance charges. Their best course of action is to offer expensive collateral, such as car titles, to get favorable rates of a debt consolidation loan.
When Is the Right Time to Consolidate Your Debt?
It is a good idea to consolidate your debt if:
- You have a clear plan that can prevent you from falling into another debt trap.
- Other than your mortgage, your total debt doesn’t take more than 40% of your gross income.
- You have a cash flow that can regularly cover your debt payments.
- You have a good enough credit score to secure a 0% credit card or low-interest loan.
Here’s a real-life example to identify when the right time to consolidate your debt is. Let’s say you own four credit cards with interest rates between 18% and 25%. Your credit remains good as long as you make timely payments. At this stage, if you choose to consolidate your debt, you are likely to get a loan at around 7%—a considerably lower rate than your interest cards.
When Is the Wrong Time to Consolidate Your Debt?
Debt consolidation is not a magic bullet for your debt. It can’t do much if you continue to indulge in excessive spending habits. Similarly, it is not recommended if your debt has gotten too big, and you can’t handle it with reduced payments.
If you have a small debt and you are confident that you can pay it in less than 12 months with your current finances, there is no noticeable advantage to consolidate your debt. Therefore, keep making payments with your old loan arrangement.
Moving Beyond Debt Consolidation –What Are Your Other Options?
If you don’t believe debt consolidation can work for you, you can go for a special type of credit card: balance transfer credit card. They have a 0% interest rate for an introductory period. Typically, you get around 12 months to pay your complete loan. But, as soon as the introductory period ends, some companies can increase the interest rate to a significantly higher rate, so plan accordingly.
Lately, loan providers don’t always hit back with high-interest rates. Instead, they are charging a balance transfer fee. Usually, you have to pay 3% .i.e. $600 off your $20,000 balance. Hence, evaluate if you are saving enough interest by paying these charges.
Mobile apps can also help with debt repayments. Some apps can carry balances from month to month. They pay off your loan quickly without incurring any late fees. To do this, they deal with your credit card company and pay your high-interest debts. Next, they extend the bill to you with a lower interest rate than your original loan. On average, users can save as much as $5,000 in lifetime interest charges.
However, qualifying for these apps requires you to score 660 or more on the credit score scale. Your card details are saved in the mobile app. An algorithm looks for the most effective method to pay the optimal amount.