What Are the Cons and Pros of Debt Consolidation

Do you find yourself in a condition of financial trouble due to consumer debt? You are not alone in your feelings. In accord withto the New York Federal Reserve, American consumers would be saddled with a total of $14.35 trillion in consumer debt by the third quarter of 2020.

If you are falling back on your credit card payments, then you could consider debt consolidation. Let’s go on to analyze the positives and disadvantages of debt consolidation to see if this is the right choice for you.

What Is Debt Consolidation, and How Does It Work?

Debt consolidation is the process of grouping all of your debts together into a single, manageable payment with a single interest rate. This means that all of your credit card payments, mortgage payments, vehicle loan payments, and student loan payments are now merged into a single payment.

As you can see, this option can be very enticing to folks who are becoming behind on their payments, especially considering the interest rate is reduced. Let’s glimpse at some of the positives and disadvantages of debt consolidation plan below.

The Advantages and Disadvantages of Debt Consolidation

Everyone has heard the adage "if anything sounds too good to be true," which suggests that it most likely is. It’s the same way with debt consolidation.

Even if it is a great remedy for people suffering from too much debt, there are both positives and cons to this debt consolidation plan. Let's delve a little deeper.

Pro Tip #1 You will benefit from a lower interest rate.

If you have a great credit score, you will nearly always be able to qualify for a reduced interest rate, which is a considerable advantage. This implies that you pay a single sum into your loan every month, and the interest rate on your loan is reduced.

For illustration, if you owe $9000 on your credit card and your interest rate is 25 percent, you will wind up paying $2500 in interest over the course of two years if you pay $500 per month toward the amount.

With a debt consolidation method, you will pay $820 in interest at a 17 percent interest rate, as well as $445 in loan repayments per month, for a total of $1,080.

Due to the decreased interest rate, the amount you pay each month decreases, as can be seen in the table above. This is only applicable if you are able to secure the reduced interest rate.

Pro Tip #2: You will be able to simplify your finances.

In the case of a debt consolidation plan, you can greatly simplify your financial situation by having only one repayment plan, one amount to pay every month, and only one interest rate to worry about.

If you've ever had a lot of different loans and had to keep track of all of their payments, due dates, and interest rates, you'll understand how much of a bother and worry it can be to keep track of everything. No one has the luxury of time for that!

In addition, because your payment amount is the same every month, you know exactly how much money you need to set aside each month for savings. Also consider how much money you have available for discretionary spending.

Pro Tip #3: You will be able to pay off your debt sooner.

Usually, with debt consolidation plans, you may pay off your debt sooner, because you can acquire a reduced interest rate on all your consumer debt. Beginning and end dates are clearly marked on the consolidation loan contract.

You may pay it off using credit card installments during the course of your lifetime. There is no time limit in this situation. As long as you are only making the bare minimum payments on your credit card debt, you could be stuck with it until you die.

This is not the case with consolidation loans. This is why they are such an excellent alternative for anyone who wants to have more control over their finances and enhance their financial skills.

Pro Tip #4: You have the capacity to increase your credit score.

You can pay off your debt preferably with a debt consolidation loan. This has a beneficial impact on your credit score. Additionally, if you are punctual in making your loan payments on time each month, this will help to improve your credit score.

With consolidation loans, you are obligated to make all of your monthly payments on schedule. That is a rule that cannot be broken.

As settlement history accounts for 35 percent of your credit score, a debt consolidation plan helps you increase your credit score little by little every month.

Additionally, accounts owing account for 30 percent of your credit score, which will be considerably improved if you close down your credit card and loan accounts when you combine them all into a single debt consolidation plan.

Pro Tip #5: It is achievable that you will not be able to obtain a lower interest rate.

As previously noted, having a decent credit score is essential in order to qualify for a lower interest cost on your debt consolidation plan.

Having problems completing your loan payments on time, it is conceivable that you do not keep a strong credit score to begin with. Ascertain whether a debt consolidation program is a good fit for you by speaking with a debt consolidation company representative.

The second disadvantage is that this could be a band-aid solution to your impulsive spending habits.

If you are having issues paying off your debts, either as a result of poor spending habits or as a result of a tough time restricting your expenditures, a debt consolidation plan will merely function as a bandage for the larger problem.

It’s wonderful for you to acquire a debt consolidation plan, but only if you work upon your financial habits alongside the repayment plan. They should be in harmony with one another.

Gather with others who are on the same path as you, potentially through social media, and get serious about building healthy money habits!

In this manner, you may pass on these principles to your children as well, ensuring that they do not become locked in the cycle of poor financial management.

Inconveniently, there are up-front fees to worry about.

There are certain upfront charges that you will have to account for when signing up for a debt consolidation plan. Loan origination costs, balance transfer fees, closing costs, and annual fees are examples of fees that may be charged.

If you do not keep the financial capacity to handle all of these charges, a debt consolidation plan may not be the ideal option for you. The best line of action, once again, would be to contact an agency that can oblige you in selecting the best course of action.

Financial Independence Is Within Your Reach – With a Little Hard Work

Now that you know the positives and drawbacks of debt consolidation, you can make a more sensible judgment on whether this choice is for you or not.

If you are still perplexed, please contact Alleviate Financial Solutions right away for assistance. They have supported over 20,000 families on their journey to financial freedom, and they can assist you as well!

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