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 excellent option in the event that you qualify for a low interest rate, and make your payments punctually and avoid the burden of debt in the coming years.
Updated on February 2, 2023
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If you’re in the middle of multiple streams of debt, like high-interest credit cards medical bills, personal loans, debt consolidation can combine them in one fixed monthly installment.
Getting a or using a balance transfer credit card can make sense if it lowers your annual percentage. But refinancing debt has pros and cons even at a lower rate.
Quick look at the pros and cons of debt consolidation
The pros of debt consolidation
Cons of debt consolidation
You could get an offer at a lower cost.
You’ll have just one payment per month.
You may be able to pay off debt quicker.
It is possible to build credit.
You may not qualify for a low cost.
Missed payments could make things worse.
It doesn’t tackle the root causes with debt.
The pros of debt consolidation
You could get an offer at a lower cost
The main benefit that debt consolidation offers is paying off your debt with the lower rate of interest and thus saves you money.
For instance, if you’re in the middle of $9,000 debt, with an APR of 25percent and a total each month’s payment at $500, then you’ll pay $2,500 in interest over about two years.
If you choose a loan that has an APR of 17% and a repayment term of two years The new monthly amount would be $445, and you’d pay only $820 interest.
If you’re eligible for a , you will be able to pay no interest for the promotional period, which can last up to 21 months. You’ll likely also pay the 3%-5 percentage fee for balance transfer.
Utilize our tool to check your total balance, your total monthly payment and combined interest rate across debts.
You could get out of debt faster
By consolidating at a lower interest rate it is possible to use the savings you made on interest to pay off of debt faster.
In the above example Your monthly installment could be changed from $500 to $445. If you don’t really need the $55 in other places, and you are looking to clear your debt as soon as possible it is possible to continue making monthly payments of $500.
When you add your savings towards your remaining balance, you’ll reduce the term of repayment for your loan and save more on interest since you’ll make fewer monthly payments overall.
This strategy has an even better return on investment with the use of a credit card for balance transfers. Since you’ll not be paying any interest during the promotional period, the savings you apply to your account could be significant.
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You’ll only have one monthly payment
Instead of keeping track of multiple monthly payments and interest rates, consolidating allows you to consolidate the debt into one installment with an interest rate that is fixed and doesn’t change during the term of your loan (or in the promotion period in the case of a balance transfer card).
However, it’s more than just the process of reducing your debts. Consolidating could provide an easy and encouraging final goal of becoming debt-free, especially if don’t have a financial plan to follow.
It is possible to build credit
The process of applying for a new type of credit is a credit inquiry, which can reduce your score temporarily by just a few points.
However, if you make your monthly payments punctually and completely, the overall impact should be positive especially if you’re consolidating credit card debt.
The process of paying off your credit card balances reduces your score , which is among the major elements 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
Answer a few simple questions to get personalized rate estimates from multiple lenders.
Loan amount
on NerdWallet
Cons of debt consolidation
You may not qualify for a low cost
Balance transfer cards can be difficult to obtain and usually require outstanding credit (690 credit score or higher).
Consolidation loans are easier to access, and there are loans specifically designed for those with bad credit (629 credit score or lower). However, those with the highest scores generally get the best rates.
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If the lender isn’t able to offer a lower interest rate than the current one generally, debt consolidation isn’t an option. In this instance, think about another debt payoff strategy, like the or methods.
It is possible to fall behind on the payments
If you don’t pay your debt on time for your new loan, you may be in much worse position than when you started.
For instance, if do not pay the balance transfer card within the promotional period with zero interest, you’ll be stuck paying it at a higher APR — potentially higher than the original debt.
If you default on the consolidation loan and you are unable to pay, you can rack up late fees, and your missed payments could be reported to credit bureaus, which could negatively impact your credit scores.
Before consolidating, make sure the new monthly installment fits well within your budget for the entirety of the payment period.
The root problem
Although consolidation is an effective tool, it isn’t a sure fix for recurring debt, and it doesn’t address the habits that lead to debt in the beginning.
If you have trouble balancing your spending it could be a risky choice. When you take out a loan to pay off credit cards, for example, those cards will be able to carry a zero balance again. It is possible that you will make use of them prior to the new debt is paid and you’ll be in an even deeper hole.
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If you have some debt, you’re better off contacting a reputable nonprofit who can assist in establishing an effective debt management program, versus trying to tackle it on your own.
How do you get an debt consolidation loan
A debt consolidation loan involves searching around for the most beneficial loan one, which is typically the one that has the lowest interest. Some lenders will allow you to see potential rates without affecting your score on credit.
Three places to find an opportunity to get a credit consolidation loan:
: Credit unions tend to offer lower rates of interest for loans for debt consolidation loans for fair- or bad credit borrowers. You’ll need to be an active members of the credit union before applying.
The banks also provide loans to consolidate debt, but borrowers and customers with excellent or good credit scores are most likely to be accepted.
: Online lenders offer debt consolidation loans to borrowers of all credit brackets. You’ll still want to ensure that the APR is less than the total rate of interest on your existing debts.
When you’ve located the ideal loan and are now ready to apply, gather your personal information like documents proving your identity, Social Security number and income proof to be submitted to complete the application. Most applications are online and require only few minutes to complete.
Depending on the lender you select, loans can be funded on the same day that you’ve been approved or within one week.
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NerdWallet has reviewed the personal loan products from over 35 banks. Below is a list of lenders that offer the best credit consolidation loans.
Lender
Credit bracket
The best for
APR range
The ratings of NerdWallet are based on the opinions of the editorial staff. The scoring formula takes into account aspects we believe are consumer-friendly, including impact to credit score, rates and fees as well as the customer’s experience and responsible lending practices.
on Discover’s website
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 beneficial to the consumer, including the impact on credit score, fees and rates customers’ experience, and ethical lending practices.
on SoFi’s website
Good to outstanding.
There are no fees.
7.99% – 23.43% .
The ratings of NerdWallet are based on the opinions of our editorial team. The scoring formula takes into account aspects we consider to be beneficial to consumers, including the impact on credit score rates and fees, the customer experience and responsible lending practices.
on the website of LightStream.
Excellent to great.
Low rates.
6.99% – 23.99% .
NerdWallet’s ratings are determined by the editorial staff. The scoring formula is based on aspects we believe are friendly to consumers, such as the impact on credit score, fees and rates customers’ experience, and responsible lending practices.
on the website of Happy Money.
Fair.
Repaying your credit card debt.
7.99% – 29.99% .
NerdWallet’s ratings are determined by our editorial team. The scoring formula is based on 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 Upgrade’s website
Bad.
Direct payment to creditors with discount.
8.49% – 35.97% .
The NerdWallet ratings are decided by our team of editors. The scoring formula is based on factors we consider to be a good choice for consumers, such as 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% .
The author’s bio: Jackie Veling covers personal loans for NerdWallet.
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