Should You Take Out a Debt Consolidation Loan

Between student loans, mortgages, credit cards, and personal loans it always seems like we’re trying to pay off expenses, but they never seem to go away. Unfortunately, borrowing money has become a normal aspect of life and it happens to be the only way many Americans can get by in the financial climate. Did you know that the average American has almost $40,000 in personal debt and that’s not even including home mortgages? In fact, this number has been steadily increasing over the years. And when you’re in debt, it feels like you’re trapped in a black hole that’s impossible to get out of. 

You may be wondering how you can pay off your loans and which loans to tackle first. But, what if we told you there was another option – debt consolidation. What exactly is debt consolidation and is it worth it to apply for a debt consolidation loan? Don’t worry, we’ve got all the answers you’ve been looking for.

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What is Debt Consolidation?

To break it down into the simplest terms, debt consolidation takes all the debts you have and puts them into one monthly payment. It’s mainly used for medical bills, personal loans, mortgages, and credit cards. 

For example, if you have many different credit cards, you have to pay monthly payments on each card all on different due dates and with different interest rates. Trying to keep track of all these factors, especially when you have a lot of credit cards is extremely overwhelming. Debt consolidation allows you to take out a loan to pay off all your debts, which results in you only having to pay off one loan – the debt consolidation loan. This means you’ll only have to deal with one payment a month instead of trying to juggle multiple loans. You may even end up saving money on interest and monthly payments if your loan’s interest is less than the APR (Annual Percentage Rate) on your debts.

What Are Some Advantages?

As we briefly mentioned, debt consolidating allows you to save money on interest, which can help you pay off your debts sooner. In addition to saving you money on interest, consolidating your debt can help you boost your credit score. Credit scores depend on making timely payments and having low levels of debt. Perhaps the biggest advantage relates to the ease of just having to pay off one bill a month instead of several bills. You’ll save money this way by not having to pay fees for late payments.

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What Are Some Disadvantages?

There have to be some reasons why more Americans who are in debt don’t apply for a debt consolidation loan. You’re right to be skeptical, as debt consolidation may seem too good to be true. We said that the debts from all your loans will be moved to one debt, but for some people, this encourages accumulating more debt. Just because you move something somewhere else, it doesn’t mean your debt magically disappears. 

One thing you may be surprised to learn about debt consolidation loans is that there can be hidden fees associated with the loans, which include early repayment. You can actually be charged for paying off your debt too early. Albeit this reason alone, you may not even qualify for debt consolidation with good rates, based solely on what caused you to go into debt to begin with. Did you know that your bank can actually require collateral for consolidation loans? Real estate, vehicles, retirement savings, and personal items are often used as collateral.

What Are Some Alternatives? 

It may seem like reverse psychology, but you can actually consolidate your debt by getting more credit cards. You’re probably wondering how this works and it’s actually pretty simple. When you get a new credit card, there are 0% interest introductory offers when you transfer money. In general, you’ll have up to a year to pay off your balance without paying any interest. The issue comes with balance transfer fees which usually cost around 3%, which adds up quickly. 

If you take away anything from this article, just make sure to do your research before applying for a consolidation debt loan. There may be options that are more suitable for you.

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