Nov 04 • 3 mins read
Is it Wise to Get a Consolidation Loan For Credit Card Debt?
Credit card debt can pile on quite a lot especially if you keep paying only the minimum outstanding amount. The situation can become difficult if you have more than one credit card. The revolving nature of the credit card loan makes it a vicious cycle of debt, if not managed well. This can hurt your credit rating, making it difficult to avail a loan further on. Therefore, it is important to pay off your credit card debt. One of the most common means is by consolidating credit card debt into loan.
What is a Consolidation Loan?
Banks and financial institutions offer a range of debt consolidation options or consolidation loans. A consolidation loan essentially allows you to roll multiple credit card debts into a single new one. It can be of different types as follows:
- Balance Transfer: A balance transfer allows you to transfer the amount you owe on one card to another card. Several credit card balances can be transferred onto a card with 0% introductory interest rate, thereby allowing consolidation. While there is generally a balance transfer fee, the interest kicks in only after a certain period, making it a viable option to save on interest and pay off the debt at a lower cost. Generally, a high credit score is required for this arrangement.
- Unsecured Personal Loan: You can avail an unsecured personal loan to pay off several credit card outstanding balances. It has a fixed interest rate and fixed repayment tenure with a fixed monthly instalment. Most banks charge an origination fee to help initiate the loan, but the interest rate is generally lower than that on credit cards, allowing you to pay off your credit card debt comfortably.
- Home Equity Loan: If you own a home, it is possible to take a loan on your home equity. It is a lump sum loan with a fixed interest rate, which is generally lower than your credit card interest rate. Non-payment of dues can result in you losing your home, making it a risky proposition.
There is really no best way to consolidate credit card debt. It all depends on the amount and nature of debt outstanding and the financial position of the borrower.
Advantages of a Consolidation Loan
- Loan consolidation presents an opportunity of paying off all your credit card debt all at once, thereby relieving you of credit card debt.
- Many consolidation instruments come with a lower interest rate, allowing you to save outflows on interest- a financial advantage.
- Bringing all credit card debt under a single umbrella prevents the hassle of tracking several credit card payments with different dates and amounts. It also reduces the risk of you missing out on payments.
Disadvantages of a Consolidation Loan
- Over long time periods, consolidated instruments may cost more than paying off the credit cards itself.
- Certain instruments like home equity loan put your life assets such as your home at risk. This is undesirable.
- Because debt consolidation options are easily available, they may deter you from imbibing healthy debt management habits such as timely repayment of credit cards in full.
Should You Avail a Consolidation Loan?
Make sure you do the math with respect to your outstanding amounts and your financial position and habits. To start off, assess your various credit card outstanding balances and determine how long you will need to pay it all off. Then, study the market and evaluate the various consolidation options with their interest rates, offers and deals etc. Assess how long you will require to pay off the consolidated debt. These steps will help you arrive at a decision.
Credit card consolidation may look like a convenient option to pay off credit card debt. The real deal, however is to get out of the debt cycle by using your credit cards wisely. Assess your financial habits both for the short term and long term rather than turning to remedial measures like consolidation. It is best to pay off your credit card debt in full and in a timely manner.