You’ve found yourself with high-interest loan payments, or perhaps you’ve reached the end of an educational program and are now faced with the prospect of paying off your student loans. One way to address these debts is through debt consolidation. While this strategy can help streamline your finances, it doesn’t improve any underlying financial challenges. Read on for a look at the advantages and disadvantages of paying off your loans through debt consolidation.
Advantages of Debt Consolidation
Streamlines Your Finances
Combining several outstanding debts into a single loan reduces the total number of payments you have to make while bringing down the interest as well. Consolidating can also help you improve your credit by reducing the chances of you making a late payment or missing a payment.
May Help You Repay Debt Sooner
If your debt consolidation loan has a lower interest rate than all the individual loans you currently have, you may be able to repay your debt sooner than expected.
May Bring Down Your Monthly Payment
When consolidating your debt, your overall monthly payment will likely come down because future payments may be spread out over an extended loan term. While this may be a perk if you are looking at things from a monthly budgeting standpoint, it could mean that you’ll have to pay more interest over the course of the loan term.
Disadvantages of Debt Consolidation
May Come with Additional Costs
Taking a new debt consolidation loan could involve additional fees, like balance transfer fees, closing costs, loan origination fees, etc. When comparing debt consolidation loans, ensure that you understand the actual cost of each loan — this will help you make an informed decision.
You May Pay More Interest Over Time
If you opt for a longer loan term, it is likely that you will end up paying more interest over the course of the loan term, even if your monthly payment goes down. So, if you are looking to consolidate your debts with a new loan, it’s best if you opt for a short loan term.