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If you have high-interest credit card debt, have trouble making loan payments, or have trouble keeping up with multiple payment due dates, debt consolidation may be right for you. a good option, especially if your credit score has improved since you took out your loans.
While consolidating high interest debt with a personal loan or balance transfer credit card can make sense in some situations, it’s not for everyone. Let’s dive deeper into how debt consolidation works, along with some pros and cons you’ll want to consider.
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What is debt consolidation?
Debt consolidation is when you take out a new loan and use the funds to pay off your original debt. You can consolidate debt with a personal loan, balance transfer credit card, home equity loan or home equity line of credit (HELOC). Here are some common types of debt consolidation.
Debt consolidation with a personal loan
If you pursue debt consolidation with a personal loan, you can lower your interest rate, improve your loan terms and streamline your monthly payments. You can find debt consolidation loans in banks, credit unions and online lenders. If you can get a personal loan with an interest rate lower, you may find it easier to pay your debts and high interest can be released faster debt.
You can compare personal loan rates various lenders using Credible, and it will not affect your credit score.
Debt consolidation with a balance transfer credit card
When you consolidate credit card debt With a balance transfer credit card, you get a new credit card, ideally with a low interest rate or 0% APR introductory offer for a certain period of time. You then transfer your existing card balances to the new card and make one payment each month.
Debt consolidation with a mortgage or HELOC
Consolidating debt with a home equity loan or home equity line of credit (HELOC) may be an option if you have positive home equity (the difference between what you owe on your mortgage and the value current home).
If you are approved for a mortgage, you will receive a lump sum cash advance and can then use the money to pay off your existing debts. Then you’ll start making home equity loan payments on the amount you borrowed, plus interest. HELOCs are also a type of second mortgage, but they are a line of credit that you can draw on as needed, up to your credit limit.
If you use one of these options to consolidate your debts, you may be able to get a lower interest rate than a debt consolidation loan because your home will act as collateral to secure the loan.
Advantages of debt consolidation
A part of the most notable advantages of debt consolidation include:
You can get a lower rate
The biggest advantage of debt consolidation is that you can lock in a lower interest rate and save a lot of money in interest. Depending on the strategy you choose and the amount of debt you have, this could equate to hundreds or even thousands of dollars. You can use this extra money to pay off your debt faster, to increase your emergency fund, or any other short or long term financial goals.
You will only have one monthly payment
It is not easy to follow several installments monthly payment. Debt consolidation allows you to combine your debts into one new monthly payment with a fixed interest rate that will remain the same throughout the loan period (or during the promotional period with a balance transfer card). Simplify the repayment of your debt can give you a clearer path to free you from your debts sooner and make the process less overwhelming.
You can get out of debt faster
If you consolidate debt at a lower rate, you can use the money you save on interest to get out of debt faster. You will be able to put the money you save on interest towards your balance and shorten your repayment term, which can help you save even more. To really speed up your mission to pay off debt, try getting a balance transfer card with a 0% introductory APR offer.
Disadvantages of debt consolidation
Before going ahead with debt consolidation, consider these disadvantages:
You may need to pay a fee
The lender and the debt consolidation strategy you choose will determine the type of fees you may be responsible for. If you take out a personal loan, for example, you’ll likely have to pay an origination fee or an application fee to process the loan. Consolidation with a balance transfer card usually comes with a balance transfer fee of 3% to 5% of the amount you transfer, while debt consolidation with a home equity loan may include closing costs.
You are not assured of an interest rate lower
In a perfect world, you’d be able to lock in a lower interest rate on a personal loan, balance transfer card, or home equity loan so you could really save when you consolidate debt. But the reality is that the lowest rates are reserved for those with strong credit. If you have fair or bad credityou may find it difficult to qualify for the low interest rate that makes debt consolidation attractive.
Your debt may return
the debt consolidation is a strategy to help you get out of debt. If you tend to overspend, your debt may return. While consolidating debt can be a good choice if you are currently in debt and want to get out, it will not attack the root of the problem or expense or savings problems you may have.
When debt consolidation makes sense
Debt consolidation can be useful if:
- You have a strong credit and may be eligible for an interest rate lower. If you have good or excellent credit and can get a lower rate than you’re currently paying, debt consolidation can save you money on interest and even help you pay off your debt longer. rapidly.
- You want to simplify the payment process. If you have multiple monthly payments with their own due dates and decide to consolidate debt, you will only have one payment to worry about.
- You work hard to control your spending. If you used to spend too much, but are taking steps to manage your budget and living within or below your means, debt consolidation can help you achieve a debt-free lifestyle.
Of course, debt consolidation does not make sense in certain scenarios. If you have a small debt that you can pay off quickly, it’s probably not worth it, especially if you have to pay fees.
If you don’t have the best credit or your credit score is lower than when you originally incurred your debt, you may have difficulty getting approved for a low interest rate or credit card. loan or balance transfer that actually allows you to pursue debt consolidation. .
How to get a debt consolidation loan
If you want to take out a debt consolidation loan, follow these steps:
- Check your credit score. Go to a website that offers free credit scores (like AnnualCreditReport.com). You can also request your credit score from your lender, credit card issuer, or credit counselor. This way, you know where your credit stands and have an idea of what kind of interest rate you might qualify for.
- List your debts and payments. Create a list of all the debts you want to consolidate, including credit cards, payday loans, store cards, as well as any other high-interest debts. Add yourself so you know how much debt you have and the size of a debt consolidation loan you need.
- Shop around and compare options. Explore debt consolidation loans from various banks, credit unions and online lenders. Compare the rates, terms, and fees of each option to make the best decision for your unique situation.
- Apply for a loan. Once you are ready to apply for a loan, complete the application online or in person. Be prepared to submit documents such as your government-issued ID, W-2s, pay stubs, and bank statements.
- Close the loan and make the payments. If the lender is paying your creditors for you directly with your debt consolidation loan funds, check your accounts to make sure they are paid off. If the lender does not pay the creditors directly, you will have to repay each debt with the money you receive.
If you are ready to apply for a debt consolidation loan, you can Credible compare personal loan rates from various lenders, all in one place.
Debt consolidation does it affect your credit?
Debt consolidation can temporarily take a toll on your credit. When you apply for a personal loan or transfer card balance, the lender will perform a difficult credit check, which can lower your credit score by a few points. Additionally, when you open a new credit account and reduce the average age of your account, your credit score will likely decrease as well.
The good news is the debt consolidation can also help your credit. As it will lower your credit utilization, or how much of your available credit you use, you might be able to counter some of the negative effects of opening a new account. Also, if you agree to make payments on time in the full each month, you’ll improve your payment history and increase your credit score while you are there.
What credit score do you need to get a debt consolidation loan?
Credit score requirements for debt consolidation loans vary by lender. But in most cases, you’ll need a credit score of at least 650. If your score is lower, don’t worry. Some debt consolidation lenders can accept credit scores of 600 or even lower. Remember that a lower credit score will likely mean a higher interest rate, which could frustrate your debt consolidation plan.