Positive and Negative Aspects of Consolidation Loans
When it comes to trying to get out of debt, consolidation loans may be just the thing for you. However, before you look into whether you are able to get one, you will need to look into the positive and negative aspects of using one.
The benefit to choosing consolidation loans is that you can group all of your debt into one monthly payment. This is often more manageable for many families and it makes budgeting a lot simpler. It often gives people that light at the end of the tunnel that it needed.
Consolidation loans could also mean that you pay off less in the long run. Rather than worrying about whether your monthly payment on your credit card will cover the cost of your interest, you will find out how much interest you will need to pay after the agreed term of your loan. This is all calculated into the monthly repayment – something else that you will have agreed on – so you will know exactly how long it will take to pay off the loan. You will also usually find that the interest rates are lower on consolidation loans unlike those on credit cards.
However, there are downsides to opting for consolidation loans to be able to pay off all of your debts. The first is that it will be another form of credit that is added to your credit report. While this can help it, the reason for taking the loan can also harm it. Lenders will see that you struggled to pay off your single debts and needed help by taking more money; you will be seen as a higher risk.
Of course, doing this rather than defaulting on payments and declaring bankruptcy is better so your credit score will not be affect too greatly. However, if you can pay off your debts by yourself without the need to take out another loan, this is something that you should do.
Consolidation loans are usually taken out for a period of three or more years. The problem with this is that you have no idea what will happen in the future. While you have an excellent job now and can afford paying 200 dollars or more per month, you need to consider what will happen if you lose your job. Payment protection insurance is put in place for this but not everybody takes it.
You may struggle to get the lower interest rates if you already have a bad credit history. This is something that you will need to look into and spend some time to work out whether the higher interest rates are lower than the amount that you will pay on your current debts. This will also depend on the amount of money that you take out. If you want a loan for 6,500 dollars you may find that you get a better interest rate if you take out a loan of 7,000 dollars; you may end up paying less over the same length of term for an extra 500 dollars and is something to consider about consolidation loans.