A debt consolidation loan is considered a personal loan that can be used to pay off high interest debts. Most of the time, it is used to pay off credit card debt. Consolidating your debts can help you combine multiple debts into one account, simplifying your repayment plan.
When Choosing A Debt Consolidation Loan Could Work For You?
You can take out a personal loan for almost any reason. However, if you are planning to get a debt consolidation loan, it is essential to consider the following:
- You have a good credit rating.
Lenders offer personal loans to people of all credit backgrounds. However, if you want to get a personal loan with a low interest rate and favorable terms, you will probably need a good credit rating. It usually starts at a FICO score of 670.
- You have high interest rate debt.
According to Experian, the average interest rate for a personal loan is 9.41%. However, when it comes to credit cards, the average interest rate is around 16%. If you can get less interest than what you are currently paying, consolidating your debt can help you save money on those interest charges.
- You have a repayment plan.
Since a credit card is a revolving credit, it allows you to borrow and repay money on an ongoing basis. For this reason, there is no repayment plan that you can work with. In contrast, personal loans have a fixed repayment plan. They can be of great help if you want to easily manage your debts.
When Will Choosing A Debt Consolidation Loan Not Work For You?
Debt consolidation loans come with certain advantages. However, there are cases where obtaining this type of loan may not be the best solution:
- You don’t intend to change your spending habits.
Getting a debt consolidation loan might interest you because it takes the available credit on your credit card. However, if you transfer the debt and take more loans on these credit cards, your financial situation will be worse. So, it will help you if you resolve any potential spending issues before deciding to take out a loan.
- You currently have a fair or poor credit rating.
It is possible to get approval for a personal loan when you have a bad credit rating. However, you will usually have to opt for a high interest rate. This could increase the overall cost of your loan and make your monthly repayments unaffordable.
- You only have a few debts.
If you think you can pay off your credit card balance in 6-12 months, the savings you can get from a debt consolidation loan may not be worth the effort to compare, research, and apply. .
Pros and Cons of Debt Consolidation Loans
Like any other financing option, taking out a debt consolidation loan has its pros and cons.
Here are some of the main benefits of taking out a debt consolidation loan:
Taking out a debt consolidation loan can put you on a faster path to paying off your debts. Unlike credit cards, a debt consolidation loan has a fixed payment schedule which gives you a clear understanding of your debt.
When it comes to debt consolidation loans, you don’t have to worry about multiple due dates each month as this type of loan only has one repayment schedule.
Interest rates tend to vary depending on many factors. However, you will likely get a lower interest rate when purchasing a debt consolidation loan compared to a credit card.
Here are the disadvantages of a debt consolidation loan:
A debt consolidation loan can also come with a higher rate than what you are currently paying. Credit Ninja suggests finding a trusted lender who can help you with this financial situation. This way, you can get a debt consolidation loan with a lower interest rate than your other debts.
To find out if debt consolidation is right for you, it’s best to consider your current financial situation and your financial goals. If you think that you will save money and pay off your debts sooner by taking out a debt consolidation loan, then get one. However, if you think you can handle your debts on your own and a debt consolidation loan is likely to cost you more, then it is best not to take one.