Debt consolidation is a type of refinance where you take out a loan in order to pay off other high-interest debts, such as credit cards. This allows you to have one single payment for all your debt that can help you better manage your payments, and hopefully, a lower interest rate to save you money or improve your cash flow as well. Listed below, you will find some pros and cons of debt consolidation.
Pros of Debt Consolidation
- Simplify Payments: The advantage of debt consolidation is that you can simplify payments by merging them into one bill. This can help you avoid missed or late payments as you would just manage one bill versus multiple bills.
- Save on Interest: By moving all of your high-interest debt into one payment, you may be able to receive a more favorable interest rate or simply have one interest rate for all of your bills, which allows you to reduce your potential debt.
- Improved Cash Flow: Having one payment each month versus multiple payments should improve the amount of cash you have available to you at the end of each month. If you have a surplus of cash, you may be able to apply some additional amounts to outstanding debt.
Cons of Debt Consolidation
- Remaining Bills: Bills don’t go away when you consolidate, you will still have to pay back the debt. If you’re a frequent shopper, you will have to consider a long-term solution to better manage your spending habits to avoid falling back into debt again.
- Additional Interest: You could end up paying more in interest. Sometimes you may need to extend the payback period to a longer term in order to pay off your bills. Extending the time to pay off your debt will increase the amount of interest that you will pay in the long run.
- Excludes Secured Loans: A disadvantage of debt consolidation is that it may not include secured loans such as an automobile loan. Debt consolidation may only apply to unsecured debt like credit cards, personal loans, or medical debt. If you have other debt, you will still have to add that amount to your monthly budget.
There are a number of options for credit card debt consolidation, including using your home’s equity in connection with a cash-out refinance, home equity loan, home equity line of credit (HELOC), or a debt consolidation credit card. Before you choose which option is best, learn more about how to consolidate debt and whether it’s a financially smart move.
Freedom Mortgage’s experienced loan advisors are here to help you find the best solution for your financial needs.