Knowing that debt consolidation has some disadvantages, you may be wondering if it is a good step to take. So, “Is Debt Consolidation a Good Idea?” If you have this question in mind, you should read this article.
Consolidating your debts can help you pay off the debts you owe faster and it should also be an option for those in bankruptcy. But, before deciding on whether it is good for you, there are some factors you should consider. You will discover them as you read on.
Is Debt Consolidation a Good Idea?
Firstly, you need to know what the term “Debt Consolidation” means. This term simply refers to a method used by borrowers to deal with their debt. This could be a debt associated with auto loans, medical loans, student loans, etc. But it is mostly associated with credit card debts. It is also known as debt relief and it involves the process of combining many debts into a single debt. This makes it easier for borrowers as they can merge their debt into a single payment made to a single lender and this comes with a lower interest rate.
Requirements for Getting a Debt Consolidation
To get Debt Relief, you need to meet certain requirements. The requirements however depend on the company you are seeking a consolidation from. The general qualifications you will need to get it includes:
- Proof of Income. You can’t seek a consolidation without proof of income. Every lender is curious to know if you have the financial ability to make payments and meet the loan terms. With this, you should know that your proof of income is very vital.
- You also need to be financially stable to get consolidation. This is because you will be required to make monthly payments.
- Every lender will also check your credit score. This gives accurate details about your credit history. A higher credit score will help you get a loan with better interest rates.
These are the most important requirements needed. If you took home equity as collateral, you may qualify for a larger loan. So, Is Debt Consolidation a Good Idea? Read through its Pros and Cons to find out.
What are the Pros and Cons of Debt Consolidation?
Although Debt consolidation may be a good idea, it is not right for everyone. If you have various debts to pay off, it can help you combine them into one fixed monthly payment. Below are the advantages and disadvantages of getting a consolidation.
It helps you manage your debts as they are all combined into one monthly payment. This option also helps you pay off and get out of debt faster. The combined debts also mean you get a lower interest rate. Lastly, it helps you build your credit which is very important. You build your credit score with it when making monthly payments on time and in full.
Although Debt consolidation may help your financial health, it has some disadvantages. If you use a home equity loan to secure your debt, the collateral may be seized if you fail to make monthly payments. Also, when you get a loan with a similar interest rate and choose a longer repayment time, you may pay more interest in the long run. Lastly, you may not qualify for a loan with low-interest rates.
How to Know if Debt Consolidation is Right for You?
To know if debt consolidation is right for you, you should consider if you are creditworthy. A higher credit score will earn you a loan with an interest rate better than the one you are currently paying for. Also, consider your spending if it’s under your control. If the loan you will get does not affect your monthly gross income much, it may be a good decision.
How to Consolidate Debt
Having read to this point, you should be convinced on whether or not debt consolidation is right for you. Here are the steps that will help you when you want to consolidate your debt.
- The first step to take when you want to consolidate your debt is to add up all the debts. This will help you determine how much you owe and how much you need to borrow.
- Next, you need to calculate your Average Interest Rate. Every of your debt has different interest rates. You can calculate the average of this rate and this is your Weighted average interest rate.
- After this, you need to determine what you want in a loan. Based on your income and credit history, you may want a loan with lower interest rates or fees. You may also want a loan with flexible monthly payments.
- Next, you need to search for lenders that offer debt consolidation loans. This includes online lenders, traditional banks, or credit unions.
- When you search for lenders, you can check if you prequalify with the best lenders. When you check your prequalification, you will be given different loan terms. To check for prequalification, you may be required to provide your income, employment status, and employment information.
- Next, you need to compare the loan offers. Go through the loan requirements, rates, repayment terms, and every other detail about the loan options you have.
- The last step is to formally apply for the loan that best suits you. Based on the lender, you may be required to apply online, over the phone or in person. During the application process, your lender may ask for more financial and personal information.
After applying for the loan, you need to wait for your application to get approved. If you applied from an online lender, you may get approved within the same day of consolidation. When you receive your loan, ensure you pay off your debt.
Frequently Asked Questions
Still on the topic of Debt Consolidation, you should g through this section of the article to learn more about this topic.
What are the Disadvantages of Debt Consolidation?
There are some drawbacks of debt consolidation. Although it may help you pay what you owe, it does not guarantee that you will not go into debt again. If you have bad spending habits, there is every possibility that you will go back into debt again. Also, there may be some upfront costs attached to some loans. This includes an annual fee, origination fees, or balance transfer fees, etc., When you miss a monthly payment, it may also affect you and there are chances that you will be asked to pay a higher rate.
Should I Consolidate My Debt?
Before you apply for a consolidation loan, you should consider some factors. You need a good credit score to secure a loan with a better interest rate. If you prefer a fixed payment and you want one monthly payment, consolidating your debt is a good idea. Also, consider whether you are able to repay the loan on time before you think of consolidating your debt.
Is Debt Consolidation Bad for Your Credit?
Although debt consolidation lowers your monthly payments, it can affect your credit score temporarily. During the application for a loan, it may cause a pull on your score thus reducing it. It may also affect your credit utilization thus lowering your credit score.
What Happens When I Consolidate all My Bills?
When you consolidate your debt, all your bills will be rolled into one account. With this, you will be are to make one monthly payment to a specific lender. This does not mean that your debts have are totally erased.