Life is often about checks and balances. There are good points and bad points to every situation. What should ultimately drive our decision-making is whether the good points outweigh the bad points in a set of circumstances. This is particularly true of debt consolidation, which can be a godsend when things line up and a nightmare when they don’t.
Let’s take a look at some of the pros and cons of debt consolidation.
Debt becomes easier to manage:
There is no question that debt consolidation can make your debts easier to manage when applied correctly. It can also provide greater peace of mind by easing the stress of managing a multiplicity of financial obligations each month.
Interest rate reductions:
The average credit card interest rate (as of this writing) is nearly 21%. Meanwhile the interest rate on a personal loan can be as low as three percent (assuming your credit score qualifies you for the best possible rate). This differential can mean enormous savings over the lifetime of a loan.
Improved credit score:
One of the metrics by which your credit score is determined is your credit utilization ratio. This is how much you owe against how much you’re qualified to borrow. Lenders prefer it to be 30% or less. Taking a consolidation loan will free up the balances on all your other obligations, while simultaneously increasing the amount you can borrow. This can push your utilization ratio closer to — or even below — 30%, which will result in a higher credit score.
Now, with all of that said, when considering debt consolidation pros and cons, it’s important to understand consolidating debt does not make it go away. Rather, consolidation restructures your obligations to make them easier to manage.
You have to be certain you’ve addressed your spending issues and gotten them in check if that’s what caused your credit situation to get out of hand.
The moment you apply the funds of a consolidation loan to your credit cards, their outstanding balances will be reduced to zero. Suddenly, you’ll have a stack of plastic in your hands all singing, “Keep on using me until you use me up.” Go for the okie-doke and you’ll find yourself in an even deeper hole than before you did the consolidation.
Every consolidation loan you encounter will have some sort of fee attached. Moreover, if you go the balance transfer route and take advantage of an irresistible introductory offer, you could also find yourself looking at an even higher interest rate if you cannot pay off the transferred amount before the introductory window closes. These factors will add costs to your consolidation approach, so it’s important to make sure you can meet the terms of the deal before accepting it.
Maximizing the Pros and Minimizing the Cons
With these debt consolidation pros and cons in mind, it’s important to look carefully at each offer you get to be certain its terms will work for your particular situation. After all, the best deal in the world can turn sour if you can’t live up to your end of the bargain — regardless of the reason.
Further, when it comes to debt consolidation, there are several different ways to go, some of which minimize the downsides while amplifying the upsides — and vice versa.
However, in each instance, you must be certain your credit score is ideal for the agreement you’re considering, your income will allow you to repay the loan comfortably, and you have your spending in check to avoid deepening your debt.