If you're struggling to pay back debt from multiple credit cards and/or other finance accounts, you might want to consider consolidating your debt with a new loan. Here are pros and cons to think about, however.
Pros
Have A Single Monthly Payment
When you consolidate your debt, you may be able to reduce the number of bills and monthly payments you need to keep up with. This can help keep you from forgetting to send payments on time and worrying about having enough money to pay each bill on top of your other regular expenses. A single monthly payment can also keep payments predictable, especially if you're able to lock in a fixed interest rate.
Lock In a Debt Consolidation Lower Rate
If you have several accounts that you're trying to pay off at once, it can be difficult to get ahead when some (or all) of them have high interest rates. When you apply for a debt consolidation loan, you might be able to lock in a rate that is lower than any of them.
Free Up Cash
With a lower interest rate and single monthly payment, you may be able to free up cash that would have otherwise been going to pay off your previous accounts.
"Your accounts' interest rates and repayment terms determine your monthly payments, and you may be able to lower your overall monthly payments by combining multiple debts into one," says Louis DeNicola at Experian.* "For example, if you take out a debt consolidation loan to pay off several credit cards, your loan's monthly payment may be lower than the credit cards' combined minimum payments. You can then decide whether you want to put the savings toward paying down your debt faster or for other expenses. And you have the flexibility to change your choice depending on your current needs."
You Can Eliminate Your Debt Sooner
You might be able to eliminate your debt faster if you get a lower, fixed rate. Streamlining your debt can help make it easier to manage and avoid late payments and fees that can add onto your debt. You may also be able to avoid having to pay as much interest as you would have with multiple higher interest debts.
Your Credit Score Might Improve in the Long Run
Your credit score is likely to improve in the long run as you pay off your debts. You'll have less accounts with balances and a better payment history. You may also lower your overall credit utilization ratio and debt-to-income ratio.
Cons
If Not Careful, You Can Put Yourself in More Debt
While consolidating makes your debt easier to manage, you can still put yourself in more debt if you're not responsible. Once you have a single, lower interest monthly payment, you may be tempted to open up additional accounts, but this can put you back to where you started.
Potential Fees Will Vary
Fees will vary depending on the terms of your loan, but there are some potential costs you may have to pay, such as an application fee, origination fee, late payment fee, annual fee, balance transfer fee, and/or a penalty for early payoff.
Your Loan Might Not Have a Lower Interest Rate With a Poor Credit Score
Ideally, your loan will have a lower interest rate than your previous accounts, but this isn't always the case for everybody.
"The interest rate you receive for any new loan or line of credit will depend on your credit score and credit report," writes Jasmin Suknanan at CNBC.** "Generally, a higher credit score will allow you to qualify for lower interest rates, while a lower credit score will land you higher interest rates. It’s also a good idea to not apply for a new loan if you’ve recently applied for other lines of credit since too many hard inquiries on your credit report can lower your credit score and lead to higher interest rates. Personal loan and debt consolidation lenders do accept applicants with less than ideal credit scores — while you’ll be approved for the loan, you’ll likely receive a higher interest rate if your credit score is on the lower side."
Your Credit Score Might Suffer in the Short Term
Your credit score might take a hit in the near term. This is because there will likely be a new inquiry into your credit report in addition to a new credit account. If you close old accounts during the process, this can also contribute to a lowered score. Even still, if you pay your new loan back responsibly, your score is likely to improve.
Where there are both positives and negatives to consolidating your debt, if you are responsible in how you pay back your loan, the pros can outweigh the cons. Click here to set up an appointment with one of our bankers to discuss debt consolidation options.
* https://www.experian.com/blogs/ask-experian/pros-and-cons-of-debt-consolidation/
** https://www.cnbc.com/select/debt-consolidation-pros-cons/