The Process of Debt Consolidation
The process of debt consolidation is consolidating one or more high interest rate loans, credit cards, medical bills, auto loans, and even student loans to a lower interest rate consolidation loan. Individuals who have multiple high interest rate loans should consider this option as it provides convenience with just one monthly payment and generally a lower interest rate.
Debt consolidation, in addition to simplifying your finances, ideally provides the borrower with a lower interest rate, fixed payoff date, and fixed monthly payments.
FIVE Advantages of Debt Consolidation
Debt consolidation is the most effective strategy to get out of debt. Here are some of the advantages of debt consolidation.
- Faster repayment:
Taking out a debt consolidation loan will help you to become debt free faster and save thousands of dollars in interest payments, especially if you have large balance credit cards at high interest rates. Credit cards do not have a predetermined schedule for paying off a balance, however a consolidation loan has fixed monthly payment and fixed term length.
Takeaway: If you pay off your loan sooner, you will end up paying less interest overall. Furthermore, the sooner you pay off your debt, the sooner you can begin saving for more important financial goals such as a home purchase, sending kids to college, or retirement.
- Financial simplification:
With debt consolidation you only have to make one payment each month. You no longer have to worry about various due dates and amounts due to each specific creditor. Additionally, the payment is consistent month after month, so you know precisely how much money to set aside.
Takeaway: When the loan money is used to pay off other obligations, debt consolidation might combine two or three payments into one. This can simplify planning and reduce the likelihood of missed payments.
- Reduced interest rates
The average credit card interest rate is roughly 19.6 percent as of January 2023. Conversely, the average personal loan interest rate is little more than 10.6 percent. Of course, prices vary depending on your credit score, loan size, and term length, but a debt consolidation loan is likely to have a lower interest rate than your credit card.
Takeaway: Debt consolidation loans for clients with strong to exceptional credit often offer interest rates that are much lower than the average credit card.
- A predetermined payback schedule:
If you utilize a debt consolidation loan to pay off your debt, you’ll know exactly how much you’ll have to pay each month and when you’ll have to make your last payment. If you merely pay the minimum on a high-interest credit card, it may take years to pay it off and there is no predetermined date that your debt will be paid off.
Takeaway: With a set repayment plan, your payment and interest rate stay constant for the duration of the loan, and there are no surprises in your monthly debt payment.
- Boost credit
While a debt consolidation loan may initially reduce your credit score due to a harsh credit check, it will most likely enhance your score over time. This is because making on-time payments will be far easier than paying multiple creditors multiple different amounts each month. Because your payment history contributes to 35% of your credit score, paying a single monthly bill on time should dramatically improve your score.
Takeaway: Debt consolidation can boost your credit score. This is especially true if you pay your loans on time, as payment history is the most important factor in evaluating your credit score.
FOUR disadvantages of debt consolidation
There are several disadvantages to debt consolidation that you should be aware of before taking out a loan.
- It will not address financial issues on its own
Debt consolidation can not ensure that you will not get into debt again. If you have a history of living beyond your means, you may do so again after you are debt-free. Make a reasonable budget for yourself and stick to it to avoid this. You should also start saving for an emergency fund that will allow you to avoid using credit cards in the event of a financial disaster.
- There may be some initial expenses
Some debt consolidation loans have costs attached to them. They might include:
- Fees on an annual basis.
- Fees for balance transfers.
- Closing expenses.
- Fees for loan origination.
When taking out a debt consolidation loan, inquire about any costs associated with late payments or paying off your loan early. These costs might range from hundreds to thousands of dollars depending on your lender. While paying these costs may still be worthwhile, you should carefully consider the pros and cons of debt consolidation before determining if this option is right for you.
- You may have to pay a higher rate
Your debt consolidation loan may have a higher interest rate than what you are now paying on your debts. This might occur for a number of reasons, including your present credit score. If it’s on the low end, the danger of default is higher, and you’ll probably have to pay more for credit.
The loan size and loan term are two more factors that may cause you to pay more in interest. Extending the length of your loan may reduce your monthly payment, but you may wind up paying more interest in the long run.
To choose the best debt consolidation plan, balance your present financial needs with your long-term financial goals.
- Late payments can cost you back even more
If you skip one of your monthly loan payments, you will most certainly be charged a late fee. Additionally, some lenders will charge you a returned payment fee if a payment is returned due to insufficient funds.
Furthermore, because lenders often disclose late payments to credit agencies after 30 days, your credit score might suffer significant damage. This may make it more difficult to qualify for future loans and qualify for lower interest rates.
If you are looking to pay off high interest rate credit card debt consider a debt consolidation loan with one of Landmark Legal’s approved lenders. Contact Landmark Legal and speak to a certified debt relief specialist today. Consolidate your high interest rate credit card debt and begin your path toward financial freedom with Landmark Legal today!