Should You Consolidate Your Loans? – Advice
Many of us have a lot of different debts we are juggling: auto loans, student loans, a credit card or two. Have you ever wondered whether you would be better off consolidating these debts? It all depends on what you are trying to accomplish. There are both benefits and drawbacks to consolidating.
A few things to consider:
Is your goal to reduce your monthly financial obligations? Consolidating debt into one longer term loan can lower monthly payments. This can be a good option if you are simply unable to pay the amounts you currently owe per month and are in the credit repair process. But, there is often a trade off in the form of a longer term on the loan. You could be making payments for years longer than you would without consolidation. This can add thousands of dollars in excess payments.
Consolidating can be convenient. Many people like the ease of paying a single bill every month. But, there are other options for simplifying bill paying, such as automated withdrawals, that do not have the potential drawbacks of consolidation. If convenience is your only reason to consolidate, it would be better to reorganize the way that you pay your bills instead.
Consolidation can be smart if it locks in a lower interest rate. This will not always be possible if you have a low credit score. But, if you have a lot of debt on high-interest credit cards, you may be able to find an installment loan at a lower rate. Consider both the interest rate and the monthly payments to figure out whether you’d be getting a better deal.
In some circumstances, consolidation can improve your credit rating. For instance, if you have a number of credit cards that are close to their spending limits, paying them off with a consolidation loan can raise your score. This can be a boon if you are working towards a home purchase and are just a few points shy of loanable. But, a debt consolidation loan will require a hard check of your credit, which can slightly lower your score for a short time.
Look into DIY debt consolidation by transferring balances. Do you have a low-interest credit card with a high limit? It could be possible to consolidate some of your debt by using that card to pay off other, higher interest, loans.
Research well to avoid scams. Be sure you are dealing with a reputable company, particularly when you are looking for consolidation loans online. Your best bet is to check first with your local bank or credit union and then with social lending sites like LendingClub.com. Be wary of sites that advertise debt consolidation services but who actually offer debt management, a service where they merely pay your current installment or revolving loans for you, for a price.
The best thing for your credit is to lower your balances overall. Whether you opt to consolidate or not, the most important way to improve your credit is to lower your levels of debt. By paying down debts, you increase your unused credit, and gradually improve your credit worthiness, making your home owning dream closer to coming true.
