- Debt consolidation loans can lower monthly payments and reduce the time it takes to eliminate debt.
- Consolidation loans can often save you thousands in interest due to the shorter loan term and, in some cases, a lower interest rate.
- Debt consolidation loans are best for those with more outstanding debts than you can repay in a year and enough income to make the new loan payment comfortably.
Personal debt consolidation loans roll multiple accounts into a single loan. The new loan can simplify and expedite the debt payoff process and, in many cases, will save you money. Consolidation can be a good idea when you transfer high-interest balances, such as credit card accounts, into a fixed rate and term loan.
The challenge with debt consolidation is that it does not address the habits and behaviors that led to high debt balances. Therefore, debt consolidation loans are not always a good option and could worsen the problem in some cases.
Circumstances When Debt Consolidation Loans May Be the Best Option
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Qualifying: Debt consolidation loans require lender approval. The process includes a credit check and income verification to determine the approval status and terms you receive.
To qualify, you must earn enough to warrant more debt and have good enough credit to get reasonable terms. Some lenders specialize in approving those with less than perfect credit, but the terms may be unfavorable. Recent late payments,existing judgments, and other derogatory events on your credit file could prevent approval or result in terms that make it challenging to repay the new loan.
Earnings: You consistently earn enough to make the new payment. The loan will feature a set payment for a set time period. In most cases, loans do not exceed five years, which could increase monthly expenses if you are only paying the minimum on credit cards.
Current debt levels: Are current debt payments (including housing costs) no more than 50% of income before taxes? When debt payments exceed,half your income lenders are unlikely to approve more debt, even if it would be used to transfer existing balances. In this case, other debt-relief options, such as debt settlement, could better address your needs.
Circumstances When Debt Consolidation Loans May Not Be the Best Option
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Spending habits: If you currently spend more than you earn, a debt consolidation loan could make matters worse. Freeing up existing balances to support overspending could result in even more debt. Review your budget and spending habits before using a new loan to pay off current debts.
Current Debt Levels: When you can repay existing balances within a year, it may be better to repay balances without a new loan. Debt consolidation lenders typically charge origination fees and closing costs, limiting savings on loans for 12 months or less. In this case, a credit card balance transfer may be a better option.
Financial Discipline: Having the discipline to stop credit use and control spending could enable you to repay balances without another loan.
Many consumers find the thought of dealing with debt overwhelming. To rectify the situation, you must stick to a strict budget, cut spending, and in many cases, make serious financial sacrifices to get rid of debt. Doing this on your own may feel impossible.
If you have tried and failed to eliminate balances on your own, a debt consolidation loan could be the answer. To qualify, you must have decent credit, earn enough to get another loan, be able to make the new payment for the entire loan term. If you can meet this criterion and have spending under control, you may be able to pay off debt faster and save thousands of dollars in interest through adebt consolidation loan.
Is debt consolidation a good reason to borrow money?
If you are ready to eliminate debt and earn enough to afford the new loan payment, debt consolidation could reduce the time it takes to repay existing balances and save money on interest.
How do I know if I should take out a debt consolidation loan?
Begin by evaluating your current debt and spending levels. For debt consolidation to work, youmust be able to live within your means while repaying the loan. If you do not earn enough and control overspending, a loan could worsen your financial problem.
What are the risks of a debt consolidation loan?
As with any debt, there is the risk of default. You also risk adding new debt to paid-off accounts if spending is not under control. A debt consolidation loan could be an excellent way to eliminate debt if you earn enough to make the new payment and do not add new debt to paid off accounts.