If you have several loans, you have probably have looked into debt consolidation. For some, it is a good option to get out of debt. But, is it always better to have one big loan or, could multiple small loans be the better option for you?
Advantages of Having Multiple Small Loans
Many people will argue that you will save more money in the long run if you hold multiple small loans. Since you are borrowing a smaller amount, you will pay less in interest. And, different lenders may offer lower interest rates and fees that will also be to your benefit.
Another reason for maintaining multiple smaller loans is because it allows you more flexibility with your funds. When managing multiple loans, you can adjust your payment schedule to pay either those with either the highest interest rates or the largest amount first. Once you pay off one loan, you can then redirect your money towards the remaining ones.
Benefits of Paying a Single Big Loan
On the other hand, taking out a single, large loan will streamline your finances and make them easier to manage. For those who have difficulty keeping track of multiple payments, a single loan makes it simple. It also means there is less chance you will miss a payment or incur late fees. And, you won’t have to stress about which loan to pay first.
Not only does a single loan give you a clearer picture of your total debt, but it also protects your credit score. Defaulting on your loans will hurt you if you are trying to rebuild credit. So, a single loan can help you stay on track to meet your financial goals. Furthermore, it will make it easier to obtain credit or additional loans if necessary. However, if you don’t address the underlying issue or develop healthy financial habits, you could find yourself even deeper in debt.
Is Debt Consolidation Right for You?
Debt consolidation is a valuable tool in helping people become debt-free. However, it isn’t the best choice for everyone. You should discuss it with your financial advisor to decide if one big loan is better than multiple small loans. Opinions will vary based on your personal finances and habits. It is often a smart move for people who hold multiple high-interest loans since they can usually get lower interest rates on a single personal loan.
However, keep in mind that your credit score will be a major factor in whether it is the best option for you. And, it will take a hit since there will be several hard inquiries. Even if you get approved for the loan, you may not qualify for a lower interest rate if your credit score isn’t high enough or if it hasn’t improved since you took out the initial loans. In this case, multiple small loans might be the better choice for you.
At the end of the day, you want to choose the option that will give you the best interest rates and lowest fees to help you pay down your debt faster.
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