The average American is nearly $100,000 in debt. This includes everything from mortgages and auto loans to student debt and hospital bills.
Obviously, this much debt hanging over your head can be stressful. Your situation can get worse if you start to have trouble paying your bills. Unfortunately, this is quite common, as many types of debt come with high-interest rates designed to keep you indebted.
If you find yourself in this position, it’s time to start weighing the pros and cons of debt consolidation. Debt consolidation can provide major relief for some consumers. However, it’s certainly not for everyone.
Keep reading to find out all about the debt consolidation benefits and disadvantages.
Smaller and More Manageable Payments
First, let’s answer the question, “What is debt consolidation, and how does it work?”
A debt consolidation loan is a large loan that absorbs your smaller debts. This combines all of these payments into a single, more manageable payment. Not only does this make it simpler to pay off debt, but it often results in a smaller monthly payment, which is ideal for most borrowers.
Less High-Interest Debt
Next, when looking at the pros and cons of debt consolidation, you have to look at your total payments over time. Most smaller debts like credit cards, personal loans, and in-store financing debts have exorbitant interest rates.
By using a company like Liquid Loans to consolidate your debt, you can gain access to a much lower interest rate, which will save you a substantial amount of money over time.
Improved Credit Score
One of the best debt consolidation benefits is an improved credit score. When you get financial assistance in the form of debt consolidation, it “wipes out” several of your debts.
While you still owe this money under a different title, having fewer debts makes you look better to the credit bureaus. As noted earlier, you’ll also have a lower monthly payment (in total), which will improve your debt to income ratio.
While exploring the pros and cons of debt consolidation, it’s important to note that not everyone will be able to get approved for a debt consolidation loan. Of course, various lenders have different standards for eligibility.
In some cases, you’ll be able to get approved, but perhaps not for as much money as you wanted. Yet, every bit of debt consolidation is a step in the right direction.
Your Debt Doesn’t Go Away
As we mentioned earlier, when you consolidate your debt, it doesn’t lower the overall amount of money you owe. While it will save you money in terms of interest, you’ll still owe the same principal amount. Debt consolidation and debt forgiveness are two very different things.
Potentially Longer Payoff Periods
Finally, when looking at the pros and cons of debt consolidation, understand that taking out a consolidation loan could extend the life of some of your debts. For example, if you have a high-interest credit card debt, a focused effort could have it paid off in a year or two.
When you consolidate your debts under a large loan, it’s usually for a minimum of five to seven years. Conversely, if you refinance your home to consolidate your debt, you’re looking at a renewed mortgage for 15 to 30 years.
Have You Weighed the Pros and Cons of Debt Consolidation?
Do you need financial help? Have you considered debt consolidation?
As you can see, there are pros and cons of debt consolidation. If the cons are worth the benefits, we recommend looking into your options today. And if you’re looking for more financial tips, check out some of our other articles before you go to find the information you need to save money, pay off debt, and live a better life.