The pros and cons of Debt Consolidation
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The pros and cons of Debt Consolidation
Debt consolidation could be a good idea when you are able to get a lower interest rate, make payments on time and stay out from debt for the near future.
Updated on February 2, 2023
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If you have multiple streams of debt, like high-interest credit cards medical bills, personal loans, debt consolidation can unite them in one fixed monthly payment.
Getting a or using a credit card to transfer balances can make sense in the event that it lowers your annual percentage. But refinancing debt has pros and cons — even with a lower rate.
Quick overview: Pros and pros of debt consolidation
The pros of debt consolidation
Cons of debt consolidation
You could get an offer at a lower cost.
You’ll only have one payment per month.
You could be debt free in a shorter time.
You could build your credit.
You may not qualify for a lower rate.
Missed payments could make things worse.
It doesn’t tackle the root causes that arise from debt.
Pros of debt consolidation
You could get a lower rate
The biggest advantage for debt consolidation lies in the ability to pay off your debt with the lower rate of interest and thus saves you money.
If, for instance, you’re carrying $9,000 of total debt with a combined APR of 25percent and a payments of 500 dollars per month, you’ll be paying $2500 in interest over the course of two years.
But if you were to take out a with an APR of 17% and a repayment period of two years The new monthly amount would be $445. you’d pay only $820 interest.
If you qualify for a , you will pay zero interest during the promotional period that can be up to 21 months. There’s a chance that you’ll also have to pay an amount ranging from 3% to 5 percent balance transfer fee.
Use our to see your total balance, total monthly payment and combined interest rate across debts.
You can be debt free in a shorter time
By consolidating at a lower rate you can also make use of the money you saved on interest costs to get out of debt faster.
In the above example, your monthly payment would change from $500 to $445. If you don’t require that $55 elsewhereand would like to be free of the debt as quickly as you can You could continue to make monthly installments of $500.
By applying your savings to the outstanding balance you’ll ultimately reduce the term of repayment for your loan and save more on interest since you’ll make smaller monthly payments.
This method can yield an even greater payoff when you use the use of a credit card for balance transfers. Because you don’t have to pay any interest during the promotional period, the savings you apply to your account could be substantial.
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You’ll only have one payment per month
Instead of keeping the track of numerous monthly payments as well as interest rate, consolidating allows you to make one installment with an interest rate that is fixed and will not change throughout the duration of your loan (or during the promotional period, for a balance transfer card).
But it’s not just about the process of reducing your debts. Consolidating can give you a clear and motivating end goal to be debt-free, especially if you don’t have a plan in place.
It is possible to build credit
In order to apply for a new kind of credit is a credit check, which could be a temporary reduction in your credit score of just a few points.
If, however, you complete your monthly payments punctually and completely, the overall result should be positive, especially when you consolidate financial debt with credit cards.
The process of paying off your credit card balances lowers your , which is one of the biggest factors that determines your score.
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See if you pre-qualify for a personal loan and it will not affect your credit score
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Con and cons of debt consolidation
There is a chance that you won’t be eligible for a low cost
Balance transfer cards are difficult to obtain and typically require good to outstanding credit (690 credit score or more).
Consolidation loans are more readily available, and there are loans specifically designed for those with bad credit (629 credit score or lower). However, those who have the highest scores typically get the best rates.
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Unless the lender can offer a lower interest rate than your current debts generally, debt consolidation isn’t a good idea. If this is the case, you should consider another debt payoff strategy such as the other methods.
You could fall behind on payments
If you miss payments toward the new debt, you could be in much worse position than when you started.
In the case of example, if you don’t pay off your balance transfer card within the zero-interest promotional period, you’ll be stuck paying the balance at a higher rate that could be greater than the original loan.
If you default on the consolidation loan, you could incur late fees and your missed payments could be reported to the credit bureaus, which could negatively impact your credit score.
Before consolidating, be sure the new monthly payment fits comfortably in your for the entire payment period.
The root problem
Although consolidation is an effective tool, it isn’t a sure fix for recurring debt. It doesn’t tackle the habits that lead to debt in the first place.
If you are struggling with excessive spending, consolidation is a risky option. If you take out an loan to pay off credit cards for instance, the credit cards will carry no balance. You might be tempted to use them before the new debt is paid which could lead to deeper into.
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If you’re in debt an outstanding debt, you might be better off speaking with a reputable nonprofit who can help set up an effective debt management program, versus trying to tackle the issue by yourself.
How to obtain a debt consolidation loan
Getting a debt consolidation loan is about comparing the most beneficial loan one, which is typically the one with the lowest interest rate. Some lenders will let you to see potential rates without impacting the credit rating.
There are three places you can find a credit consolidation loan:
Credit unions typically provide lower interest rates on consolidating debt loans for fair or poor-credit borrowers. You’ll have to be a member with the credit union prior applying.
Banks also offer loans for debt consolidation, however, existing customers and borrowers who have excellent or good credit tend to be more likely be accepted.
Online lenders can provide the debt-consolidation loans to all credit ranges. You’ll still want to make sure the APR is less than the rates of your current credit card.
After you’ve found the perfect loan and are now ready to apply, you’ll need to gather your personal information like documents proving your identity, Social Security number and income proof that you’ll provide in your application. The majority of applications are online and require only some minutes to fill out.
Based on the lender you select, loans can be funded the day you’re approved, or within a week.
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NerdWallet has evaluated personal loan products from over 35 banks. Below is the list of lenders that offer the best credit consolidation loans.
Lender
Credit bracket
Best for
APR range
NerdWallet’s ratings are evaluated by the editorial staff. The scoring formula considers factors we consider to be friendly to consumers, such as the impact on credit score, rates and fees as well as the customer’s experience and ethical lending practices.
on Discover’s site
Good to outstanding.
Fast and quick funding.
6.99% – 24.99% .
The ratings of NerdWallet are based on the opinions of the editorial staff. The scoring formula takes into account the factors we believe to be friendly to consumers, such as the impact on credit score, rates and fees as well as the customer’s experience and ethical lending practices.
on SoFi’s site
Good to excellent.
There are no fees.
7.99% – 23.43% .
NerdWallet’s ratings are evaluated by the editorial staff. The scoring formula is based on the factors we believe to be beneficial to consumers, including the impact on credit score rate and fees, the customer experience and ethical lending practices.
on the LightStream website
Good to outstanding.
Low rates.
6.99% – 23.99% .
NerdWallet’s ratings are evaluated by our team of editors. The scoring formula takes into account factors we consider to be beneficial to the consumer, including the impact on credit score, rates and fees, customer experience and ethical lending practices.
on the website of Happy Money.
Fair.
Repaying the credit card balance.
7.99% – 29.99% .
NerdWallet’s ratings are determined by our team of editors. The scoring formula is based on factors we consider to be consumer-friendly, including impact to credit score, rates and fees, customer experience and ethical lending practices.
on Upgrade’s website
Bad.
Direct payment to creditor with discount.
8.49% – 35.97% .
The NerdWallet ratings are decided by our team of editors. The scoring formula considers aspects we consider to be beneficial to consumers, including impact on credit score, fees and rates as well as the customer’s experience and ethical lending practices.
on the Upstart website.
Bad.
Borrowers with little credit history.
6.50% – 35.99% .
Author bio Jackie Veling covers personal loans for NerdWallet.
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