You’ve put in an application for a house. After a few days, you get hit with a denial letter. Your credit score is too bad for you to qualify.
You’re dealing with too much debt. All the cards that you’ve maxed out are coming back to bite you now. You can begin hacking away at all of your bills individually, or you can take care of it by using a personal loan to consolidate debt.
There are many pros and cons to going this route. We can help you find out if it’s right for you. Check out this guide to learn more.
How Does Consolidation Work?
Before we get into the benefits of taking out a loan, let’s talk about how consolidation works. It involves taking out a large loan to tackle your other debts.
This frees you up to only have to tackle one big debt instead of paying off all the little ones. Seeing your credit card account balances dip down to 0 is enough to give anyone a dose of serotonin.
Benefits of Consolidation
Feeling the stress leave your shoulders by clearing out most of your bills is only one benefit of debt consolidation. You could also reduce your interest rate and fix your credit.
You’ll also only have one due date to worry about each month, which can be pretty nice. It makes keeping up with your loan much easier, at least.
Reduce Your Interest Rate
A lot of personal loans have a lower interest rate than credit cards and student loan debt. If you can reduce the amount of interest that you have to pay by consolidating, that gives you more money in your pocket each month to throw at the Plenti personal loan.
As long as there aren’t penalties for paying off your loan early, you might be able to get out of debt faster. You’ll also be paying much less in the long run.
You’ll Have a Timeline to Work With
When you have a bunch of little bills that you have to pay each month, it can be hard to keep up with them all. There’s a good chance that one of them will slip through the cracks simply because you forgot about it.
By consolidating, you only have a single payment that you have to worry about every month. You’ll be much less likely to skip out on your bill by accident this way.
You’ll Fix Your Credit
Debt consolidation can affect your credit in different ways. Most personal loan companies will do a hard check of your score before they’ll agree to give you the money. Hard checks will make your score dip down a little, but it will go back up after a few weeks or so.
New credit counts as a risk in the eyes of lenders. So, the simple act of opening a new credit account can cause your score to dip down for a short time.
Still, if you’re able to make your new loan payments on time, your score will see a boost. It may take a while, but soon you’ll be debt-free.
Cons of Consolidation
Debt settlement through a consolidation personal loan isn’t all sunshine and rainbows. If you aren’t prepared or you don’t do your homework, you could end up in worse shape than you were before.
You Could End up With a Higher Interest Rate
There’s no solid guarantee that your new loan will come at a lower interest rate than the older ones. Even if you do lower your interest rate, it’s still possible that you could pay more in the grand scheme of things.
For example, let’s say that you have three credit cards that you’re consolidating. You would have them paid off in about two years, or you could consolidate your debt and pay off the loan in 5.
You’ve paid off the maxed-out credit cards with the loan, but you’re going to spend three extra years paying it off.
There’s Usually Fees Involved
In the case of most personal loans, there are extra fees involved. You’ll have to pay money to put in the application. There are orientation fees to open the account.
The orientation fees come out of the money that the company has agreed to hand to you, which gives you less that you can use to put toward the consolidation.
There are also prepayment fees to worry about. You don’t want to get punished for paying your loan off early. Not every company will hit you with a prepayment fee.
That’s why it’s important to read over the entire contract before you sign on that dotted line.
You May Make Your Problem Worse
Depending on the terms of the loan, you could put yourself in a worse situation than you were before. For example, if you take out a secured loan, you may end up putting a bunch of your stuff up for collateral. If you can’t pay back the loan, you lose your valuables.
Once you pay off your credit cards, you’ll be freed up to use them again. If you max them out a second time, you’ll be right back where you started, only this time, you’ve got another loan to worry about.
Should You Take Out a Personal Loan to Consolidate Debt
If you want to take out a mortgage or get a loan for a car, you’re going to have to take care of your debt first. With all those maxed-out credit cards under your belt, not many creditors are going to want to take a risk on you.
One of the easiest ways to deal with it is to take out a personal loan to consolidate debt. As long as you read the fine print and avoid making the same mistakes, you’ll be able to pay your cards off faster and start making repairs to your credit.
If you’re looking for more ways to pull yourself out of debt, we’ve got you covered. Visit our blog for even more tips and tricks to live by.