Debt Consolidation: The Pros & Cons (Is It Right For You?)
Owing a high amount of personal debt is more than just a monetary burden: it is a physical, mental, and emotional impediment to the growth of your funds and the wellness of your finances.
Becoming trapped by consumer debt is a serious issue that thousands of Americans face every day. The strain and subsequent stress from making payments and writing checks may become exhausting at best and will continue to spiral out of control unless drastic action is taken.
In fact, total consumer debt in the United States is $13.86 trillion, which averages to over $8,000 per American household. This includes home mortgages, car loans, credit cards, and even student loan debts.
Thankfully, debt consolidation is a straightforward and simple process that allows people from all over the country to lighten their monthly payments and begin striving towards a debt-free future.
What Is Debt Consolidation?
Debt consolidation is the act of combining all consumer debts into one large bill with a single interest rate. This rate is typically much lower than most consumer debt interest fees, which can run as high as 36%.
Once a consumer has applied for and received their debt consolidation loan, all borrowed money is immediately used to pay down or entirely pay off their debts with other lenders. The borrower is then only required to pay back the amount loaned from their banking institution, all with a low-interest rate.
Debt consolidation loans can apply to a host of different consumer debts, including:
- High-interest credit cards
- Student loans
- Medical bills
- Personal loans
- Monthly car payments
- Cell phone bills
In general, debt consolidation should only be considered by individuals who have less than 40% of their total income in consumer debts. This ensures that monthly payments will not become large enough to sink the majority of your monthly income or jeopardize your financial goals.
Reasons To Consider Debt Consolidation
Consumers consider using debt consolidation services for many reasons besides just lowering their interest rates. Some of the many reasons that borrowers consolidate their debts include:
- Convenient monthly bills that occur within a predictable timeframe
- A lower debt total that reduces paycheck strain
- Sizable perks and benefits accompanying the loan
- Boosts to credit scores
- Reducing chances for bankruptcy
- Faster debt payoff timelines
While the various motivations for consolidating personal debt revolves around the needs of the unique applicant, borrowers considering this option should be prepared to thoroughly evaluate debt consolidation pros and cons before making a financial decision.
Debt Consolidation Pros And Cons
While debt consolidation may act as a helpful tool for reducing or even eliminating consumer debts, it is not always the perfect solution for everyone. If you are thinking about debt consolidation you are urged to first weigh all your options and consider both the pros and cons of the process before making a final decision.
Debt Consolidation Pros
Without a doubt, there are many reasons why consolidating personal debt may create a recipe for success in many aspects of daily life.
The ability to plan for monthly debt payments is a huge asset to budget-minded consumers. Instead of worrying about when the debt will affect your bank account, consolidation loans come in the form of a single monthly bill.
2. Boost Your Credit Score
Taking out a debt consolidation loan may raise your credit score by reducing utilization rates. This has been known to raise scores by over 20 points.
3. Reducing and Eliminating Debts
The ultimate purpose of a debt consolidation loan is to rapidly pay down the overhead left on personal debt.
Debt Consolidation Cons
Although there are quite a few positive aspects of the process, not all consumers should decide to take out a debt consolidation loan.
1. Here Today, Gone Tomorrow
Consolidation loans are meant to help you reduce the effects of crushing debt in your life. Not having a strong budget in place, taking on more debt, or simply refusing to address the behaviors that contributed to the original debt will counteract the purpose of the loan.
2. One Step Forward, Two Steps Back
There is no reason to consolidate debt if the interest rates offered are higher than or similar to the rates you are already receiving.
For example, if you carry a $30,000 car loan at 10% and a $5,000 personal loan at 12%, reducing your payments with a 7% debt consolidation loan may be an excellent payment relief option.
On the other hand, if these interest rates are below double digits, consolidating your debts may not necessarily be the best option. In fact, consolidation at this level may even amount to higher payments per month than what you spent before.
3. Lengthy Plans
When it comes to debt consolidation, slow and steady wins the race. However, this isn’t always a good thing.
The average term length of a debt consolidation loan ranges from three to five years, although timelines can and will vary considerably. Consumers should take into account the amount of time the repayment period will be, and how much this extra time will cost them in the long run.
If overlooked, consolidation loans may become burdens rather than debt relief opportunities.
Ready To Get A Debt Consolidation Loan?
If leveraging debt consolidation loans is the best choice for your evolving personal finance strategy, you will find that partnering with San Francisco Federal Credit Union is the right option for you, especially given our highly competitive rates.
At San Francisco Federal Credit Union, you are invited to take control of your finances by having access to our exceptional rates and resources needed to achieve your lifestyle goals.