Everyone can become a victim of debt. Not only is debt a likely result of a poverty or low-income household, but if you fancy the idea of going to college, going to the hospital, or buying a home, those can all land you in debt.
If you are worried about your debt, then the advice you are getting back no doubt is telling you to consolidate your various debts into one with either a balance transfer or a new loan, like refinancing your home or vehicle. But is that what’s best for you financially? Read on to see the pros and cons of consolidating your debt.
The main benefit of consolidating all your debt is implied in the name: you will have one sum to pay rather than a lot of little ones. Everything will be streamlined into a single monthly payment that can usually turn out to be a lot lower than the collective. Not only will it make things financially easier, but it will clear your head a little, giving you one target to meet every month, rather than loads.
The collective payment could be less than in separate payments due to the interest on each payment. As time goes on, those interest rates will rise on each of them. If you were to consolidate them, you would gain one payment, featuring one rate of interest, that, yes, will rise, but it will be easier to manage rather than managing a range of debt interest rates rising.
Another pro for the side of consolidating debt is that you may improve your credit score. Applying for a new loan may temporarily cause your credit score to dip, but it will recover with the result of you paying off lines of credit and keep going up.
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However, with the sun comes rain, and you might find that consolidating your debt into one isn’t helping you so much. This can be for a number of reasons.
For example, if you don’t qualify for a lower interest rate, you might find your interest go up. If your credit score isn’t good enough to get a lower interest rate, you might be stuck with one higher rate than the various lower rates you’re used to.
Just to pile on, consolidating your debt might mean added fees, such as origination fees, annual fees, balance transfer fees, and closing costs. If you are closing a lot of various accounts with closing costs, that could add up.
There is also added risk in your missing payments. If you miss a payment on any loan, you will find that it will affect your credit score substantially, but for consolidated debt, it may also mean fees.
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Consolidating your debt can be beneficial, as long as you are careful. Be sure you won’t miss any payments and compare interest rates and policies on comparison websites to ensure you get a loan that aids you well.
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