Pros and cons of debt consolidation loans for fair credit

Every financial product comes with both advantages and disadvantages. It is important to weigh the pros and cons of a debt consolidation loans when deciding if it is the right choice for you.

Fair credit: Debt consolidation loans are a good option

  • One monthly fixed payment – With a debt consolidation loan you can pay off all your credit card debt and replace it by one new loan. Some lenders will even direct pay creditors with a debt consolidation loans. Most debt consolidation loans come with fixed interest rates. The amount you pay each monthly will not change over time.
  • Lower interest rates Personal loans used for debt consolidation usually have a lower interest rate that credit cards. So consolidating your debt could help you save some money.
  • Less risk — Debt consolidation loan are often unsecured. That means you don’t have property or a home to secure the loan. Others, like home equity loan, may require collateral. In this case, you risk foreclosure.

Cons of debt consolidation loan for fair credit

  • You might not be eligible for the best terms Depending on your credit score, it may be harder to qualify for a consolidation loan. The interest rate and terms you wish to receive may not be available.
  • Higher interest costs Although debt consolidation loans are more affordable than credit cards they can have higher rates than secured loan like a HELOC. Consolidating your debts that have lower interest rates might not be a good idea.
  • Higher fees — Consolidating your debt with a loan for fair credit could result in fees that can reduce the amount you receive. If your credit is strong, you may be able to reduce these fees.

Alternatives to debt consolidating loans with fair credit

A consolidation loan to consolidate debt is not the only option. Here are some more options.

  • Balance card credit card:You can transfer the balances on multiple cards to one card with a balance transfer credit. These cards usually have a low initial interest rate for a short amount of time — sometimes even 0%. You should be aware that balance transfer cards may charge fees. These cards usually charge between 3% – 5% of the amount you transfer. If your balance is not paid in full within the allotted time, the card will start to accrue interest at its regular rate.
  • Home equity line of credit or loan: You might be able, if you own a property, to borrow against it to pay down debt. Your equity can be defined as the difference between what your home is worth and what you owe on your mortgage. These loans come with lower interest rates but are secured loans. Your home serves as collateral. In other words, if you fail to make your monthly payments, you may lose your home.
  • The amount you have deposited may allow your employer to give you a loan. These loans are typically low-interest and do not require you to have high credit scores. Investment gains are lost and you may have to return all funds quickly if the job you were in is terminated.

Here are some ways to improve credit

Your credit score can be improved from a “fair” level to “good” or “excellent” and you could save lots of interest. Ask for your credit reports. Examine your credit report for any errors.

Your commitment to pay all your bills promptly and on time is key. Your payment record is the key to your credit score. Your payment history is the number 1 factor in determining credit scores. It will take some time to build that history if you’ve missed any payments in past.

By paying down credit card debts and avoiding new credit applications, you can increase your credit score.

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