Loan consolidation is one of the best ways to cope with an overwhelming debt. If you feel that your capacity to pay multiple loans at the same time is straining your financial income, you should then look out for a loan consolidation plan. Loan consolidation is basically a fresh loan repayment plan that brings all these loans/debt together into one big loan. You not only get to pay the entire loan in one manageable monthly installment, but also gave it spread over a period of time. As long as you are careful with your spending and know how to manage your finances well, loan consolidation can help manage these loans very easily.
Benefits of Loan Consolidation
1. It reduces your monthly payments: With the term of loan repayment spread out, monthly repayments are spread out to manageable levels. It also allows you to choose a favorable monthly repayment plan, meaning your finances won’t be messed up. This also makes managing the loan much easier hence reducing chances of defaulting a payment.
2. It reduced interest rates paid: Whether you had taken a loan from the bank or a credit card, you will generally pay back less money in interest than you would if you chose to pay these loans individually. With much lower interest rates to pay on loans, repaying the loan will be a breeze.
3. Improves your credit score: Since loan consolidation makes it easy for borrowers to pay their loans in time, credit companies see this as a positive gesture financially. The fact that you will be able to pay the loan off and have no accruing debt gives your credit rating a positive impact. This means you will be able to apply for much bigger loans without raising a red-alert to these financial institutions.
Disadvantages of Loan Consolidation
Although loan consolidation seems like the best way get rid of debtors knocking at your door every time, it too has its downsides. Some of these disadvantages are discussed below.
1. Puts you in debt for a longer period: If your financial status allows you to repay all the debts in time, you shouldn’t call for loan consolidation. Loan consolidation buys you more time to be able to repay loans in time. This puts you in debt for much longer, meaning it could take months, or even years to clear a loan that would have otherwise been cleared in less than a year.
2. Applying for another loan will be tricky: Unless you have paid off all the debts, loaning institutions and banks may not be willing to approve any of your loan applications. This is because you already are in debt, and your credit score may not be satisfactory for them. As mentioned above, loan consolidation puts you in debt for a longer period of time hence limiting your chances of getting another loan. If you can cut down on expenses to repay these loans, it would then be much wise to avoid debt consolidation.
Loan consolidation has its advantages and downsides. It would therefore be advisable to weigh these before signing for loan consolidation.