Pros and Cons of Borrowing Money

Pros and Cons of Borrowing Money to Pay Down Debts

Before making a decision, it’s important to consider the possible upsides versus the possible downsides. This is sometimes called a cost-benefit analysis. Only by comparing the possible rewards against the possible risks can you decide whether it’s a smart idea to proceed.

Deciding whether or not to get a debt consolidation loan from a bank, credit union or online company is no exception. As with any potential strategy meant to address debt, there are pros and cons to carefully consider.

Pros of Debt Consolidation

Let’s first take a look at some of the ways in which taking out a loan to cover other outstanding debts may prove advantageous.

Monthly Payments Become Simpler

This point will hit home If you’ve ever dreaded paying bills simply because there are so many statements and due dates to keep straight.

This is especially for those of us with multiple credit cards and other types of bills. The process of paying them can become tedious — and leave room for payments to slip through the cracks. It then becomes possible to accidentally overdraw your account when a forgotten charge goes through.

Consolidating multiple other debts within a single loan means you’ll be able to focus on making that one loan payment every month.

A Loan May Reduce Interest Charges

The biggest advantage associated with consolidation is reduced interest.

According to ValuePenguin, here are the average interest rates on a debt consolidation loan by credit score:

  • Poor (300 – 639): 15.06 – 36 percent
  • Average/Fair (640 – 679): 7.05 – 32 percent
  • Good (680 – 719): 6.67 – 33 percent
  • Excellent (720 – 850): 4.52 – 57 percent

Given credit cards carry an average interest rate of 18.61 percent on new offers and 15.09 on existing accounts, you can see the potential for a consolidation loan to come in significantly lower. It all depends on how the math shakes out, given the interest rate and loan term.

You May Speed Up Your Debt Repayment

Paying the minimum amount due on debt tends to prolong its life, which makes it more expensive overall. You may be shocked to learn paying off a $2,000 balance using minimum payments — two percent of the total balance or $10, whichever is greater — would take more than 30 years.

Debt consolidation loans often have terms ranging from about two to five years, which can help you get out of debt much faster.

Cons of Debt Consolidation

What are some of the potential difficulties of debt consolidation?

Here are three.

Not Everyone Can Qualify for a Loan

Qualifying for a consolidation loan — especially a competitive one — usually depends on having a solid credit score and a steady source of income. Simply put: It’s not a viable option for everyone.

You May Not Get a Lower Interest Rate

Even if you do get approved for a loan, it’s very important to crunch the numbers and make sure you’d actually be saving money on interest. Some borrowers may find out they’ll pay more for the loan than they would repaying their other debts individually.

This is particularly true when it comes to debt consolidation with bad credit. There’s no guarantee you’ll get a lower interest rate than you’re already paying on your debts.

You Might Still Be Tempted to Spend

The temptation to spend on credit can be too real, especially when you’re feeling accomplished from wiping out those balances using a consolidation loan. What can start out as a purchase here or there can easily lead to accumulating a significant amount of debt again and having the consolidation loan to repay on top of that.

After learning more about the pros and cons of debt consolidation, you can decide whether it’s a smart idea for you based on your circumstances.

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