The Pros and Cons of Debt Consolidation
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The Pros and Cons of Debt Consolidation
A debt consolidation plan could be an option in the event that you qualify for a low interest rate, pay your bills on time and stay out of financial debt into the future.
Last updated on Feb 2, 2023.
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If you have several streams of debt like high-interest credit cards, medical bills or personal loans, debt consolidation can unite them in one fixed monthly installment.
A credit card for balance transfers is a good idea in the event that it lowers your annual percentage rate. Refinancing your debt can have pros and cons — even at a lower rate.
Quick look at the 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 monthly installment.
You could get out of debt faster.
You can build credit.
You may not qualify for a low rate.
The late payment could make the situation worse.
It doesn’t address the root problems in debt.
Pros of debt consolidation
You could get a lower rate
The main benefit of debt consolidation is that you can pay off your debt at a lower interest rate, which saves money.
If, for instance, you’re carrying $9,000 of total debt, and you have a combined APR of 25% and a total payments of 500 dollars per month, you’ll be paying $2500 in interest over the course of two years.
But if you were to choose a loan that has an APR of 17% and a two-year repayment term The new monthly amount would be $445, and you’d save $820 in interest.
If you qualify to receive a credit, you’ll not pay any interest during the promotional period, which could last up to 21 months. There’s a chance that you’ll also have to pay an amount ranging from 3% to 5% balance transfer fee.
Utilize our tool to check your total balance, your total monthly payment and combined interest rates across all the various debts.
You could be debt free in a shorter time
When you consolidate your debt at a lower interest rate you can also make use of the savings you made on interest to pay off of debt even faster.
Revisiting the example above Your monthly installment could be changed by $500, to $445. If you don’t require that $55 in other places, and you want to get out of debt as soon as possible, you could keep making monthly payments of $500.
If you apply your savings to the resting balance, you’ll eventually shorten the loan’s repayment term, which could save even more money on interest, because you’ll have smaller monthly payments.
This option has a bigger payoff with the account that allows balance transfers. Because you don’t have to pay anything in interest throughout the promotion time that means the savings you add to your account could be substantial.
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You’ll have just one monthly payment
Instead of keeping the track of numerous monthly payments or interest charges, consolidating lets you combine the debt into one installment with an interest rate that is fixed and doesn’t change during the term of your loan (or for the duration of the promo period, for an account that allows balance transfers).
But it’s not just about simplifying your repayments. Consolidating can give you an enticing and motivational end goal to be debt-free, particularly if you don’t have a plan that you have in place.
You can build credit
In order to apply for a new kind of credit will require a credit inquiry, which can be a temporary reduction in your credit score of a few points.
However, if you make your monthly payments punctually and in full, the net impact should be positive especially if you’re consolidating credit card debt.
Paying off credit card balances lowers your , which is among the major factors that affects your score.
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Find out if you’re pre-qualified for an individual loan and it will not affect your credit score
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The loan amount
on NerdWallet
Con and cons of debt consolidation
There is a chance that you won’t be eligible for a lower cost
Balance transfer cards can be hard to qualify for and typically require excellent to good credit (690 credit score or more).
Debt consolidation loans are more accessible and available, as are loans specifically designed for those with bad credit (629 credit score or less). However, those with the highest scores usually receive the lowest rates.
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If the lender cannot offer you a lower cost than your current debts and you are able to consolidate your debts, it’s not an ideal option. In this case, consider another debt payoff strategy such as the other strategies.
You may fall behind in the payments
If you miss payments toward this new credit card, you may be in much worse situation than you were when you first started.
For example, if you fail to pay the balance transfer card within the zero-interest promotional period, you’ll be stuck paying it with a higher interest rate that could be greater than the initial debt.
If you fall behind on the consolidation loan and you are unable to pay, you can incur late fees and the missed payments would be reported to credit bureaus, threatening your credit scores.
Before consolidating, be sure the new monthly installment fits well within your budget throughout the payment period.
You’ve not addressed the root problem
While consolidation can be a useful tool, it’s not an absolute solution to recurring debt. It doesn’t tackle the behaviors that led to debt in the beginning.
If you struggle with overspending it could be a risky choice. If you take out a loan to repay credit cards, for example, those credit cards will carry no balance. You may be tempted to take advantage of them until that new loan is paid which could lead to an even deeper hole.
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If you’re facing debt , you may be better off consulting a at a reputable nonprofit who can help you set up a debt management plan rather than attempting to solve it on your own.
How to get a debt consolidation loan
Getting a debt consolidation loan includes shopping around for the best loan, which is usually the one with the lowest interest rate. Certain lenders allow you know about rates without affecting the credit rating.
Three places to look for the perfect loan to consolidate debt: loan:
Credit unions usually offer lower rates of interest for consolidating debt loans for fair- or poor-credit borrowers. You’ll need to become a member of the credit union prior to applying.
The banks also provide loans for debt consolidation, but borrowers and customers with excellent or good credit are more likely be approved.
: Online lenders offer credit consolidation loans to all credit ranges. It is important to ensure that the APR is lower than the combined interest rate of your current credit card.
Once you’ve found the right loan and are now ready to apply, you’ll need to gather your personal details, including documents proving your identity, Social Security number and income proof, which you’ll submit in your application. Many applications are available online and require only few minutes to fill out.
Based on the lender you choose, loans can be funded the day you’re approved, or within a week.
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NerdWallet has reviewed individual loan products from more than 35 financial institutions. Below is a list of lenders that offer the best credit consolidation loans.
Lender
Credit bracket
The Best Option for
APR range
NerdWallet’s ratings are determined by the editorial staff. The scoring formula is based on factors we consider to be consumer-friendly, including impact to credit score, rates and fees customers’ experience, and ethical lending practices.
on Discover’s website
Good to outstanding.
Quick funding.
6.99% – 24.99% .
The ratings of NerdWallet are based on the opinions of our team of editors. The scoring formula takes into account aspects we believe are beneficial to the consumer, including the impact on credit score, rates and fees, customer experience and ethical lending practices.
on the SoFi’s website.
Excellent to great.
No fees.
7.99% – 23.43% .
NerdWallet’s ratings are evaluated by our editorial team. The scoring formula considers factors we consider to be a good choice for consumers, such as the impact on credit score rates and fees, the customer experience and responsible lending practices.
on the LightStream website
Good to outstanding.
Low rates.
6.99% – 23.99% .
NerdWallet’s ratings are determined by our team of editors. The scoring formula considers the factors we believe to be consumer-friendly, including impact to credit score, fees and rates, customer experience and ethical lending practices.
on the website of Happy Money.
Fair.
Paying off the credit card balance.
7.99% – 29.99% .
The ratings of NerdWallet are based on the opinions of the editorial staff. The scoring formula is based on factors we consider to be beneficial to the consumer, such as impact on credit score, rates and fees customers’ experience, and responsible lending practices.
on the Upgrade’s website
Bad.
Direct payment to creditors with discount.
8.49% – 35.97% .
The NerdWallet ratings are decided by the editorial staff. The scoring formula takes into account factors we consider to be consumer-friendly, including the impact on credit score, rates and fees customers’ experience, and responsible lending practices.
on Upstart’s website
Bad.
People with poor credit histories.
6.50% – 35.99% .
About the author: Jackie Veling covers personal loans for NerdWallet.
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