Debt Consolidation Loan: Is It the Right Move for Me?

As 2022 ended, household debt in the United States hit an all-time high. According to an official report from the U.S. Federal Reserve, Americans were $16.9 trillion under at the end of 2022 – a sharp increase from the $2.75 trillion household debt in 2019.

Mortgages rack up the most debt, with data showing that $11.92 million is still unpaid on house debt nationwide. On top of this, Americans owe $1.55 on vehicle loans, $1.60 trillion on student loans/educational fees, and $986 billion on credit cards. Before the COVID-19 pandemic, credit card debt stood at $927 billion.

Almost 80% of consumers across the nation possess at least one credit card, with a typical wallet or purse cramming over three pieces of plastic. The Federal Reserve notes that 46% of American adults are overdue on their credit card repayments.

It’s not just credit cards that can leave people with debt. Gambling, reduced income, divorce, underemployment, increasing health expenses, poor money management, over-splurging, and expensive cost of living also cause debt.

Fortunately, debt consolidation plans allow you to pay multiple bills in a single payment. Plans offer annual payments or monthly repayment plans. Before you contact a provider, spend some time learning about debt consolidation loan pros and cons.

Interesting Facts About Debt

People’s life satisfaction is impacted the most by medical debt. Per a survey by The Motley Fool, debtors feel shame because of their unpaid medical bills.

Based on the survey findings, shame plagues 76% of medical debt consumers, with personal loans (71%), credit cards (69%), vehicle loans (61%), and mortgages (57%) trailing closely behind. 

Fortunately, there are various debt consolidation alternatives to rebuild your credit score and clean your bills. It’s essential to consider personal loans for debt consolidation pros and cons before taking out financial aid.

Dangers of Debt

Having debt is no fun. Debt affects your credit score and harms mental health and quality of life. Debt is not a good situation, from the concerns regarding payment to worries about affording daily living costs due to mounting debt.

Carrying the burden of debt on your shoulders can restrict your lifestyle choices, e.g., you may be unable to afford a long overdue family vacation or may have to forfeit your child’s educational expenses. With time, interest costs and other late fees stack up.

Missing repayments may also result in many health problems, not to mention negatively impacting your ability to qualify for new credit. There may even come a time when collection agencies visit your home to recover physical belongings that cover the cost of debt. Facing a judge is common among debtors, too.

Reasons to Get Out of Debt

As you gradually climb out of debt, your credit score will improve. Consequently, you will likely feel happier. Per the findings of a 2014 survey from Purdue University and Gallup, debt reduction affects people’s happiness on par with earning more money.

Aside from improving mental health, you can also benefit from reduced interest rates on loans you take out in the future and reduced insurance premiums. Since employers and apartment managers usually analyze credit scores when making hiring and tenant decisions, you may find it easier to land your ideal job or home.

Being debt-free may reduce stress and improve relationships. It can also ease financial strains that put pressure on marriage. Finally, one of the main reasons to get out of debt is to create a solid financial foundation for your children’s upbringing and teach them the value of money.

Debt Consolidation Loan Can Improve Your Financial Future

Before you obtain financing to repay your existing debts, you should learn about the pros and cons of a debt consolidation loan. There are ample benefits associated with consolidation plans, including the following:

• Streamlined Payments – Instead of making payments to different accounts, debt consolidation loans bundle all your credit commitments into one plan, so you pay just one lender.
• Save money in the long run – If you can get a low annual percentage rate (APR) – the amount of interest and fees you pay – you can save enough to invest in something like cryptocurrency or a savings account.
• Get Debt-free Quickly – Some short-term debt consolidation loans stretch over 12-24 months and will feature a set end date, so you know exactly when you will be debt-free. The faster you pay, the lower your interest.
• Rebuild Your Credit Score – Payments made via debt consolidation loans will reflect positively on your credit score. Don’t be surprised if your credit score sinks slightly after applying because this is normal. It takes 6-24 months after debt settlement to rebuild your rating.

Alternatives to a Debt Consolidation Loan

Is your phone constantly being flooded with messages from collections agencies? Are you facing the risk of legal action due to unpaid debts? You can avoid legal repercussions, evictions, filing for bankruptcy, and having your vehicle or belongings repossessed if you take small steps to reduce debt today.

Take a moment to discover debt consolidation. This unique type of loan is designed especially for people with bad credit and multiple different arrears. The purpose of the loan is to pay off outstanding bills in one easy payment.

You can use the money you save by paying off your debt to invest or launch a new business. If you are ready to rebuild your life with debt consolidation but first want to understand how to get out of debt on a low income with some alternative methods, here are a few ideas:

1. Balance Transfer – What’s the difference between a debt consolidation loan and vs balance transfer? This is a question asked by many debtors. Interest-friendly, this method of debt clearance is also known as “credit card refinancing”. It involves transferring credit card debt to a no-interest balance transfer card and using available credit (often with an introductory 0% APR period) to pay the debt.

2. Home Equity Line of Credit – This alternative to debt consolidation can be risky because your home is used as collateral if you make late payments. Also known as a HELOC, this revolving credit line is deductible with a typical draw period of 10 years. Repayment periods start once the draw period is over, with most repayment plans extending over 20 years (unless you can pay sooner).

3. 401k Loan – If you can put money aside for retirement once you pay off your debts, you may consider borrowing funds from your retirement savings account. However, people younger than 60 will need to pay a 10% withdrawal penalty, and there’s no guarantee that you will be eligible for a hardship withdrawal. Additionally, you might accumulate more debt if you dip into a 401k, making debt consolidation loans the better alternative.

4. Personal Debt Settlement Loan – Loan providers who specialize in debt settlement will provide a lump sum payment that you can use as a one-off contribution to resolve an outstanding debt. Unlike a debt consolidation loan that pays the entirety of any money you owe; a personal debt settlement loan can slash the amount owed. Banks like Wells Fargo and USAA are renowned for offering personal loans. Unfortunately, poor credit history means rejection since they require a credit check. Plus, you may take out the loan only to discover that the creditor dismisses your settlement proposal.

Things to Consider When Taking Out a Debt Consolation Loan

While multiple perks are associated with a debt consolidation loan, there are also some considerations to make yourself aware of. Keep in mind the following before taking out a loan of this kind:

• Debt Consolidation Loans Should Not Be Used Regularly – Loans are an emergency type of funding; therefore, you must refrain from using debt consolidation to fund your daily living expenses.
• Some Providers Require Up-front Fees – If you’re already in debt, you might struggle to afford an upfront fee, but your application may only be successful with the starting fee. Fortunately, up-front costs are usually between 1-5% of the borrowed amount.
• Interest Rates May Inflate – The interest rate depends on the provider, with typical rates varying from 6% to 36%. You’ll pay less interest with a reasonably good credit score and a low debt-to-income ratio.
• You May Fall Deeper into Debt – Refrain from taking out a debt consolidation loan if you may miss one or more payments since this will further damage your credit rating.
• Affects Your Credit Score – A thorough credit inquiry is required when taking out a loan. Some lenders do not hurt your credit score, whereas others may create a five-point dent.

Conclusion

Now that you know the pros and cons of debt consolidation, it’s time to find a lender. Performing adequate research is critical to compare the market. Once you choose a lender, calculate the total costs to capitalize on funding to restore your financial status.

Never take out a loan if you cannot afford to repay it. If you are drowning in debt and don’t know where to turn, it may be worth discussing your monetary woes with a financial advisor.

Someone in this field will have the knowledge and patience to guide you through risk tolerance, annual expenditure, financial goals, income, and primary financial concerns.