In the US, 77% of American households have outstanding debts, and most of them have more than one. An average American has about $58,604 in debt that they have to manage. It shows that you’re not alone in this debt situation.
The best way to solve this uneasy situation can be by getting a debt consolidation loan. If you're struggling with bad credit installment loans online, you're not alone. Many individuals face this challenge. A debt consolidation loan is a type of personal loan that can help you control your repayments easily by turning all your debts into a single loan. You don’t have to worry about different lenders, repayment schedules, and repayments.
Keeping track of your repayments is sometimes overwhelming, especially if you have multiple ones. You have to remember the due dates and the different amounts to ensure you don’t fall back on paying your lenders.
The best way to solve this uneasy situation can be by getting a debt consolidation loan.
How to Know if Debt Consolidation Loan is Right for You
A debt consolidation loan is a type of personal loan that can help you control your repayments easily by turning all your debts into a single loan. You don’t have to worry about different lenders, repayment schedules, and repayments.
It makes sense to get a debt consolidation loan if the lender can provide you with a lower interest rate than your multiple existing debts. To know if debt consolidation is right for you, here are some scenarios where it’s worth thinking about:
Good Credit Score
A good credit score is an advantage if you want to get a low-interest rate and favorable terms on a debt consolidation loan. Still, if you have a poor credit score, several lenders, specialize in bad credit loans. You can also work on your credit score before applying for a debt consolidation loan.
According to Experian, the average interest rate of a personal loan is 9.41%. Thus, if you’re eligible for an interest rate lower than what you currently have, a debt consolidation loan can help you save more money in the long run. But if getting a new loan will only cost you more, it'd be best to consider other options.
Benefits of Taking Out a Debt Consolidation Loan
- Pay Off Debt Fast. A debt consolidation loan can help you pay your debt faster. You only have to worry about one debt instead of different arrangements.
- Save On Interest. If you qualify for a debt consolidation loan with a lower interest rate, you’ll save money on interest.
- Simplify Payments. As mentioned earlier, a debt consolidation loan can turn all of your debts into a single payment. It can help you handle your debt easier and avoid missing payments, which harm your credit score.
- A Fixed Repayment Schedule. Debt consolidation loans tend to have a fixed repayment schedule. It means you’ll be aware of when the loan ends.
Drawbacks of Getting a Debt Consolidation Loan
The following are potential disadvantages of taking out a debt consolidation loan:
- Upfront Costs. Depending on the lender, several debt consolidation loans have upfront fees. It includes origination fees, annual fees, prepayment penalties, etc. It would be best to ask your lender before submitting a loan application.
- High-Interest Rates. Most of the time, you can get a debt consolidation loan with a high-interest rate depending on your qualification, especially regarding your debt-to-income ratio and credit score. Stretching out your repayment term can also be a significant factor in getting a debt consolidation loan with a high-interest rate.
Does Debt Consolidation Loan Affect Your Credit Score?
Yes, here’s how it can affect your credit score:
Credit Utilization Ratio
Your credit utilization ratio reflects your credit information compared to your total debt. Therefore, your credit score will drop if you have a high credit utilization ratio due to having multiple loans(including credit cards). Getting a debt consolidation loan will save you from hurting your credit score since it's an installment credit, which doesn’t impact your ratio.
As mentioned earlier, a debt consolidation loan can help you avoid missing payments. If you are consistent in making on-time payments, your credit score will get a boost.
To Sum It Up
If you have multiple debts, you would agree that monthly payments to many different lenders can be a hassle. Fortunately, taking out a debt consolidation loan is one of the ways you can effectively manage your loans. This type of loan can also help you reduce the cost of your debt repayment, which is a significant advantage in helping you save money in the long run.