Pros of Debt Consolidation
There are several potential advantages to consolidating debt.
May reduce interest payments
A consolidation loan or balance transfer credit card with a lower APR than your current debt could reduce the total interest you’ll pay. However, if you opt for a longer repayment term in order to lower your payments, you may still end up paying more interest in the long run. Your lender will provide you with interest rate and term information during the application process, so make sure you understand your options before signing.
May be able to pay off debt faster
If you consolidate with a lower interest rate and a shorter loan term, debt consolidation could help you pay off debt faster than if you were just making minimum payments on each account.
Simplified payments
Consolidating debt into a single payment can make managing your finances more convenient. Rather than tracking multiple due dates and minimum payments, you can make a single monthly payment for all of your consolidated debts.
Cons of debt consolidation
Debt consolidation can have some disadvantages to be aware of before applying.
Potential fees
Depending on the debt consolidation method, you may run into additional fees. Debt consolidation loans may come with origination fees, which are usually a percentage of the total loan amount. Credit card balance transfers may also incur a fee when you make the initial transfer, which can either be a percentage of the balance or a flat fee. These fees can add up, so it’s essential to weigh them against any potential interest savings.
Potentially unfavorable interest rates
While debt consolidation loans may offer lower interest rates, they may not be offered to every applicant. Your credit score and financial situation have a significant impact on the interest rate for a consolidation loan or balance transfer credit card. Sometimes, consolidating debt may increase the total amount you have to pay, depending on fees and the repayment term length.
Impact on credit score
Consolidating debt may make it easier to keep up with your payments or lower your debt-to-income ratio more quickly, both of which may have a significant positive effect on your credit score. However, consolidating debt also has the potential to negatively affect your credit. Applying for a new loan or credit card triggers a hard credit inquiry, which can cause a small, temporary dip in your credit score. Consolidating a loan also closes the original loan account, which can lower the average age of your accounts. Additionally, if you miss payments on your consolidation loan or fail to pay at least the minimum on a balance transfer credit card, it could cause lasting harm to your credit score.
Deciding whether you’re ready to consolidate debt
When considering debt consolidation, it’s essential to answer a few questions to assess whether it’s the right decision, including:
- Do you have multiple high-interest debts? Since debt consolidation can help make payments more manageable and reduce interest costs, it can be helpful for borrowers with a sizable amount of high-interest debt. However, if you don’t have multiple debts or the interest rates aren’t that high, it may not be worth it.
- Will you qualify for a loan or balance transfer card? Your credit score and income will largely determine whether you qualify for a debt consolidation option with favorable rates and terms. Many lenders offer pre-qualification options that let you check your eligibility and potential interest rate without affecting your credit score.
- Can you make the payments? Consolidating debt only helps if you can consistently make payments on the new loan or balance transfer card. Missing payments could hurt your credit score and make your financial situation more challenging.
- Are you committed to avoiding new debt? Consider whether you’re ready to change your spending habits and commit to a repayment plan that will reduce your need for new debt in the future.
Understanding if consolidating debt is right for you
Debt consolidation can be useful for managing and reducing debt, but it’s not a one-size-fits-all solution. Take time to evaluate whether you’re likely to qualify for better rates and terms, whether you can afford the new payments and whether you’re prepared to make lasting changes that can help set you up for long-term success.
Citi offers personal loans to existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history, along with additional factors. If you think you could benefit from a Citi® Personal Loan, apply online today.
This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
