What Is Debt Consolidation?
Debt consolidation is a financial strategy in which you combine multiple high-interest debts into one loan with a single monthly payment. Ideally, you’ll also end up with a lower interest rate. This type of loan is also sometimes referred to as a credit consolidation loan, as you can use it to combine multiple credit card debts.
The process typically involves getting a debt consolidation loan or a personal loan, using the funds to pay off existing debts, and then repaying the loan. Most loan consolidation companies only offer debt consolidation options for unsecured debt, like debt from credit cards, store cards, and medical bills.
For example, you might have debt from three different credit cards as well as unpaid bills from a recent hospital stay. You can get a debt consolidation loan and use the funds to pay off each of these individual debts. As a result, you’ll have just one manageable monthly bill.
What Are APRs, Rates, and Terms on Debt Consolidation Loans?
When you’re shopping around for debt consolidation loans, you’ll want to consider each loan’s interest rate, APR, and term to decide which option is best for you. The interest rate is the percentage that the lender charges you for borrowing money from them. The best debt consolidation loans have fixed interest rates, meaning you have a set monthly bill.
Meanwhile, the APR (annual percentage rate) combines your interest rate with the fees, charges, and payments that determine the loan cost each year. The best consolidation loan will have the lowest APR.
The lower your APR, the less you’ll pay over time. The APR is the most important factor when shopping around for consolidate debt loans as it gives you an overall understanding of the loan cost rather than focusing on interest alone.
The loan term is the period of time during which you’ll repay the loan. Terms on debt consolidation loans usually range from two to seven years.
Benefits of Debt Consolidation Loans
Debt consolidation loans have a variety of benefits, and the most important one is your potential savings. The best debt consolidation loans have lower interest rates than credit cards, so by paying off high-interest credit card debt with a loan, you save money on interest.
This also allows you to pay off the debt sooner, as more of your money is going toward the principal amount. Plus, you can put the money you save in interest toward your loan, allowing you to pay the loan off even faster.
It’s also worth noting that a debt consolidation loan is usually much easier to manage than having multiple debts. Instead of paying several bills each month, you pay just one.
Disadvantages of Debt Consolidation Loans
While loans for debt consolidation can be very useful, there are some downsides to consider. First, even the best debt consolidation loan is still a loan, so you’ll need to stay on top of monthly payments. If you fail to, you could face late fees and potential hits to your credit score.
Debt consolidation loans can also be hard to get if you have a poor credit score. Many lenders require that you have a score of 630 or higher in order to qualify. If you’re already late on your credit card payments, you might have a poor score and have a hard time finding a lender that will approve you.
When Does a Debt Consolidation Loan Make Sense?
With the above pros and cons in mind, here are a few scenarios in which loans for debt consolidation could be the right choice:
- You are juggling several types of debt.
- You are struggling to manage multiple bills each month.
- Your credit score has improved enough to earn you a lower interest rate than that of your current debts.
- Your monthly debts, including your mortgage or rent, are less than 50% of your monthly gross income.
Will a debt consolidation loan affect my credit score?
Just like with any other type of loan, applying for credit consolidation loans will have a temporary effect on your credit score because the lenders have to run a credit check. This allows them to determine your creditworthiness. However, this is typically a short-term impact that’s easy to rebound from.
What’s the best debt consolidation service?
The best way to deal with debt depends on your personal situation. The amount you owe, the type(s) of debt you have, and your financial history all play a role. Plus, the current terms of your debt and the terms you’re looking for will also factor into your decision. Once you have a clear understanding of these elements, you can review options from each provider to make the best decision.
What are the best loans for debt consolidation?
The best loan consolidation options will vary from person to person, so it’s always important to shop around with multiple lenders. Since each lender uses different criteria to determine rates and terms, you need to compare at least three different loan consolidation companies.
The best loans for debt consolidation have the lowest rates and the most affordable monthly payments. You can compare options by using Fund.com and getting quotes from the industry leaders above.
Do I have to get a loan to get rid of my debt?
Loan consolidation isn’t right for everyone. There are a variety of ways you can deal with debt, including free debt counseling services. You can use various techniques to try to pay it off on your own, like the debt snowball method.