If you’re considering taking out a debt consolidation loan, educating yourself and weighing the advantages and disadvantages is essential. Power Finance Texas is here to lend a hand.
We’ve laid out five key questions asked about debt consolidation loans. Each question comes with insightful answers to guide you in the right direction.
1) How Does Debt Consolidation Work?
This is one of the most basic yet essential questions. Understanding how debt consolidation works is crucial in knowing whether it’s a path worth taking.
Debt consolidation is a form of debt refinancing that involves taking out a new loan to pay off and simplify your current loan payments. So instead of making various payments to multiple lenders, you make one monthly payment to one lender. This one monthly fee also comes with one interest rate.
For example, if you have four different debts—credit card balances, medical bills, and student loan debt—that total $40,000, you can apply for one debt consolidation loan for these bills. If your loan request is approved, you’ll have one monthly payment going forward until you pay off your debt. Power Finance Texas offers loans up to $1,250.
2) How Do Debt Consolidation Loans Affect Your Credit Score?
Whatever you sign up for, you want to make sure it won’t cause a permanent rift in your credit score, which is a crucial part of your financial health.
A debt consolidation loan can cause a short-term decrease in your credit score. Any type of credit application, or hard inquiry, creates this temporary dip for a few months.
But overall, if you consolidate your debts with a lower interest rate and make timely payments each month, you can improve your credit score in the long run. Having one consolidation loan with a lower interest rate can help you stay on top of payments better, and paying your loans as agreed raises your score.
3) When Is Debt Consolidation a Smart Move?
Whatever loans you decide to take out, you need to make sure it’s a smart financial move for you. Whether debt consolidation is a smart move or not depends on your debt amount, income, and interest rate options.
- Your current monthly debt payments are not over 50% of your monthly gross income.
- You have consistent income or cash flow to make monthly loan payments.
- You’re able to get a personal loan with a lower interest rate. Let’s say your student loan payments charge 20% in interest. Consolidating these into a personal loan with a lower interest rate can save you money and help you pay off the debts faster.
- Your bank offers low or no interest rates on balance transfer cards. This pertains to you if you’re looking to consolidate your credit card debts.
4) When Is Debt Consolidation Not a Smart Move?
Debt consolidation is a no-brainer solution that can save you money and bring you manageable monthly payments for many people. While this may be true, keep in mind, consolidating isn’t a magical potion for all financial situations. There are still cases where debt consolidation isn’t a smart move.
Here are some of the circumstances where debt consolidation isn’t worth it:
- Your current debt amount is over 50% of your monthly gross income. In this case, you’re likely better off seeking debt relief or relying on other debt management strategies.
- You can pay off your debt within six months to a year. In cases like these, you’d only save a small amount by consolidating, so you might as well continue making your usual payments until you pay off your debt.
- You’re not qualified for low-interest loans. If your credit score isn’t high enough to qualify for a lower interest loan, it probably won’t make sense to consolidate your debts.
5) What Are the Pros and Cons of Debt Consolidation Loans?
To ensure you make the right decision, weigh the pros and cons of debt consolidation loans. Here’s the lowdown.
- Simplifies your finances: Debt consolidation simplifies your debts into one monthly payment plan instead of having to juggle multiple loans.
- May offer lower interest rates: Depending on your credit score, you may qualify for a debt consolidation loan with a lower interest rate than the rate(s) you are currently paying. Keep in mind, this rate may change throughout the lifetime of your loan, depending on the terms and whether you repay as agreed.
- Can help pay off your debts faster: If you qualify for a low-interest rate loan, this can reduce your monthly payments and thus help you pay off your debts faster.
- Can boost your credit score: By having only one payment to worry about each month, debt consolidation can help you stay on top of your payments, which can boost your credit score.
- Can come with added costs: Be sure to read the fine print before signing up for a debt consolidation loan. Some loans might come with additional upfront costs such as origination fees, balance transfer fees, and closing costs.
- Might have higher interest rates: Even if you receive lower interest rates, there’s a possibility you could pay more interest over the life of the new loan. So take a good look at the loan term and the total loan amount. To bypass accrued interest, you might want to budget each month to pay more than the minimum payment amount.
- Might encourage increased spending: Tread carefully because lower monthly payments and interest rates might give the impression you have more money than you do. This can compel people to start spending more and accrue high balances again. Be sure to develop healthy money management habits.
Power Finance Texas Can Help with Debt Consolidation
If you find that debt consolidation is the right path for you, reach out to Power Finance Texas. As long as you qualify and have a Texas driver’s license, our team can help you consolidate your debt with a personal loan. Just fill out an application, and we’ll get back to you about your options.