Pros and Cons of Debt Consolidation
Debt consolidation is one way to manage your debts. But is it a good or a bad idea? Read on to learn if it could help you
If you’ve found it hard to manage your debts, you might be considering debt consolidation. The process won’t erase what you owe. But because it combines some or all of your debts into one account with a single bill, debt consolidation can be an easier way to keep everything straight. In some cases, it can also help you lower your overall interest rate and pay off your debts faster.
Debt consolidation can also have disadvantages. So before you decide to consolidate your debts, take a look at some of the pros and cons.
Pros of Debt Consolidation
There are a few different ways to consolidate your debt: like with a credit card balance transfer, a debt consolidation loan or a debt consolidation program, for example. However you do it, you’re combining your debts into one account with a single monthly payment, and that can help you manage them.
Here’s a look at some of the ways you might be able to benefit from debt consolidation:
- It could save you money. You could transfer your balances onto a credit card with a low or 0% promotional APR. Or you might find a debt consolidation loan with a lower interest rate than that of your older debts. Either way, paying less interest could save you a good chunk of money over time.
- It could simplify your payments. Moving all your debts into one account means you’d only have to manage one monthly payment instead of multiple. This could also help you build a good credit history, because it could reduce your chances of making a late payment or missing a payment altogether. Late or missed payments can stay on your credit reports for years and negatively impact your credit.
- It could help you pay off your debt faster. If consolidation means you’re paying a lower APR, you might be able to put more money toward paying off the principal. And that could put you on a faster track to payoff.
Cons of Debt Consolidation
Debt consolidation is available for a few different kinds of debt. But even when it’s available, it isn’t always the right choice.
Here are some reasons you should be cautious when considering debt consolidation:
- You might not get the deal you want. If debt problems have affected your credit scores, you might not be offered good terms on a new loan or line of credit. Or if you’re consolidating your federal student loans, you might have to give up some of the benefits that come with them, like principal rebates or some loan cancellation benefits.
- There might be extra costs. Other fees and costs associated with different types of debt consolidation might add to your expenses. Balance transfers, for example, sometimes come with an extra fee.
- A low APR might not last long. It could revert to a higher APR after an introductory period—increasing your monthly payment if you can’t pay off the debt before your introductory period ends.
- Your credit scores could take a hit. New credit applications could affect your credit scores. So could a change in your credit utilization ratio.
- It’s not a cure-all for debt. “It’s important to understand why you are in debt. If you have accrued a lot of debt because you are spending more than you are earning, a debt consolidation loan probably won’t help you get out of debt,” the Consumer Financial Protection Bureau (CFPB) explains.
- Debt consolidation might not save you money. As the CFPB explains, “Although your monthly payment might be lower, it may be because you’re paying over a longer time. This could mean that you will pay a lot more overall.”
Now that you know some of the pros and cons of debt consolidation, you might be able to make a more informed decision about how to pay off your debts.
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