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Is a Debt Consolidation loan good or bad? Learn About its Advantages and Disadvantages
Debt consolidation is taking one loan to pay off several debts.
The most important benefits of these loans are: making only one payment, rather than multiple ones for each of the debts. At the same time, the interest rate may be lower than the others. You may either go for unsecured or secured debt consolidation, and one of the most important benefits of the secured is that the interest rates are lower.
Loan companies generally require that you offer collateral, which is usually your property if you have any.
Advantages
Let's consider the example below:
Example:
You have 5 credit card bills to pay every month, along with an auto loan, which makes a total of 6 bills. And at the same time, you have a few overdue payments on a few of these credit cards. You take a loan, which equates to the total amount of debts that you have.
Benefits:
- As a result, you only need to make your single payment for the loan you just took. While your debts are consolidated, the monthly payments are significantly lower. On the other hand, with making payments on time every month, you have the benefit of further reversing your credit damage. Therefore, it may be considered suitable only if you're sure that you'll be able to make all your payments in a timely manner.
- More so, it's also wise to look at the introductory rates, which are also known as teaser rates, because they may be higher after a specific time period. Besides that, you have to make sure that the same rates of interest apply throughout the term of your loan.
Some debt consolidation USA companies guide you to make payments in a timely manner, which gives you an opportunity to repair your credit so that you can get all the advantages of having a good credit score.
Disadvantages
Getting approval for your debt consolidation can be difficult, as loan companies and banking institutions go through your credit report before approving your loan.
- If you haven't made payments by the due date, then you may end up paying a higher rate of interest.
- The amount you pay might be affordable, but if you make calculations, the same amount will certainly be higher after a particular period of time.
- Many debt consolidation firms provide services to catch the attention of customers by promising to work on your behalf with your financial provider. Without a doubt, you make payment for a lower amount, but a small percentage of your payment goes to all these companies, and you'll end up paying more. Therefore, it is better to work with the lending company directly whenever possible.
So, loan consolidation has its own pros and cons. That's why, you have to look at its benefits and drawbacks, before deciding to go for it. Always check out the small print before you sign a contract, so that you know the particular amount that you pay every month, and how long you would be paying it.
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