Sometimes people take out multiple loans from different creditors for various purposes. They make monthly payments to all their creditors, but it can become challenging to keep track of loans that need to be paid first. Therefore, many people choose to take out a personal debt consolidation loan, which is essentially a loan to pay off all other loans.
A debt consolidation loan has various advantages and disadvantages. On the one hand, it relieves you from the stress of managing different loans at once. On the other hand, a debt consolidation loan with a high-interest rate can cost you more in the long run. Therefore, carefully analyze the pros and cons and do the math before deciding on taking out a consolidation loan.
In New Zealand, many companies offer unsecured debt consolidation loans with flexible repayment terms and fixed interest rates ranging from 8.95% to 29.95%. You can easily apply for a loan online by filling out an application form.
In this article, we will discuss the pros and cons of getting a debt consolidation loan.
How to apply for a debt consolidation loan?
It is recommended to check out different loan options and consider your financial needs and interest rates before selecting a consolidation loan. A simple google search will provide you with various options for online personal loans Nz offered by banks, credits unions, and online lenders.
Applying for a debt consolidation loan requires you to;
- Check your credit score, which should be enough to meet the minimum credit score requirement of the lenders.
- Determine the amount of money you need to borrow to consolidate your debt.
- Properly research different lenders and choose the most appropriate option for your situation.
- If you pre-qualify for a debt consolidation loan, lenders will explain the terms and the amount of the loan that you will receive.
- You will be required to fill out an application form online or in-person to formally apply for debt consolidation.
- After receiving funds, pay for all your loans. After that, regularly pay for the consolidation loan to avoid a negative credit score.
Pros of Debt Consolidation
For many people, debt consolidation is th e only way to pay off all their debts. Debt consolidation offers various benefits like lower interest rates and fast and streamlined debt payoff. Let’s discuss the benefits of debt consolidation in detail;
1. Simplified finances
Combining all your debts from different creditors into a single debt owed to a single lender can help streamline your finances. You will not have to worry about several loan payments with different interest rates each month. Paying more than one creditor each month can also increase your chances of missing a payment.
Therefore, you can make a single payment to one creditor at a fixed interest rate. Moreover, choosing debt consolidation provides you with a timeline that specifies when you will be free of debt.
2. Fixed repayment schedule
Debt consolidation makes it clear how much money is due each month, so you can easily budget and rarely miss your payment. A long-term fixed repayment schedule leaves little room for unforeseen fluctuations that can increase the amount of your monthly debt payment or interest rate on it. Consolidating all your debt provides you with a specific time implying when your last payment will be, allowing you to plan your finances accordingly.
3. It helps boost your credit score.
In the beginning, debt consolidation can lower your credit score, but it improves your credit score over time. Paying multiple debts each month increases the risk of missing a payment and consequently lowers your credit score. Payment history has a negative impact on your credit score. Therefore, regularly check your credit score and timely pay the consolidated debt payment each month to significantly increase your credit score.
4. It helps to repay debt sooner.
Credit card debt has no specific timeline for paying it off. Therefore, it is easier for credit card debts to pile up. However, a debt consolidation loan has a set timeline for paying it off. Monthly payments provide you with a fast track to getting rid of your debt as soon as possible. Moreover, rapidly paying off your debt also means lesser overall interest.
So we can conclude that a consolidated debt helps to repay your debt faster, and you can save money for other goals like investments, emergency funds, launching or expanding your business, buying a house, and more.
Cons of Debt Consolidation
Debt consolidation can seem like an excellent option to pay off all your outstanding debts. However, there are several risks associated with it. Some of them are as follows;
1. Different up-front costs
Some debt consolidation loans have hidden and up-front fees like annual fees, loan origination fees, and more that must be paid. Therefore, it is encouraged to carefully read the terms and conditions before taking out a debt consolidation loan.
You can also ask the representatives about hidden costs like fines on late payments. Every lender has a different set of rules, and you should calculate the total amount of debt you would be paying by adding these costs as well.
2. Higher interest rate
The interest rate on your consolidating debt depends upon your credit score. Therefore, you might have to pay a higher interest rate than what you pay on your existing debt. Moreover, the terms and amount of your loan can also lead to a high-interest rate. Sometimes, people choose to make lower payments each month for loan repayment and end up paying more in interest in the long run.
So you can end up paying a high-interest rate on your consolidated loan if your credit score is low. Therefore, carefully calculate the total amount of money you will be paying in the long term to decide whether debt consolidation is right for you or not.
3. It stops you from addressing the root problem.
It is crucial to develop healthy financial habits when taking out a debt consolidation loan. A consolidation loan only helps you pay off your accumulated debt. Therefore, it is easier for you to land in an even deeper debt after paying off your initial debt.
Hence, we conclude that consolidating debt only helps you pay the debt off and stops you from addressing the root cause of your financial problems.
The Bottom Line
Many people paying off multiple debts choose to take out a debt consolidation loan to pay off all their loans. Afterward, they only have to make monthly payments for paying off a single debt. A debt consolidation loan seems like an excellent option to pay off your loans sooner, streamline your finances, boost your credit score, and have a fixed repayment schedule. However, there are also some drawbacks to this strategy. Some of the cons include a higher interest rate, different up-front costs, and failure to address the root problem of your financial problems. Hopefully, this article will help you understand the pros and cons of getting a debt consolidation loan.