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 when you are able to be eligible for a low-interest rate, make payments punctually and avoid the burden from debt for the future.
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If you’re in the middle of multiple streams of debt, such as high-interest credit cards, medical bills or personal loans consolidating debt can combine them to make one monthly fixed installment.
Utilizing a credit card for balance transfers is a good idea in the event that it lowers your annual percentage. However, refinancing debt comes with advantages and disadvantages — even at a lower rate.
Quick glance: Pros and negatives of debt consolidation
Pros of debt consolidation
The cons of debt consolidation
You could get an offer at a lower cost.
There will be only one payment per month.
You may be able to be debt free in a shorter time.
It is possible to build credit.
You may not qualify for a low cost.
The late payment could make the situation worse.
It doesn’t address root issues in debt.
Benefits of debt consolidation
You may be able to receive a lower rate
The biggest advantage for debt consolidation lies in that you can pay off debt with an interest rate that is lower and thus saves you money.
For instance, if you’re carrying $9,000 of total debt, and you have a combined APR at 25%, and total each month’s payment at $500, then you’ll pay $2500 in interest over the course of two years.
If you borrow a loan with an APR of 17% and a two-year repayment term, the new monthly payment would be $445. you’d pay only $820 interest.
If you are eligible for a , you would be able to pay no interest for the promotional period, which can run for up to 21 consecutive months. You’ll likely also pay an amount ranging from 3% to 5 percent balance transfer fee.
Check out our site to view your balance total, total monthly payment, and total interest rate for all your debts.
You may be able to 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 to get out of debt more quickly.
Revisiting the example above In the example above, your monthly payments could be changed by $500, to $445. If you don’t require that $55 in other places, and you would like to be free of debt as soon as possible, you could keep making monthly payments of $500.
If you apply your savings to the outstanding balance you’ll shorten the loan’s repayment term, which could save even more interest as you’ll be making fewer monthly payments overall.
This strategy has an even greater payoff when you use a balance transfer card. Since you’ll not be paying any interest during the promotional time, the savings you apply to your balance could be substantial.
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There will be only one monthly installment
Instead of having to keep an eye on several monthly installments and interest rates, consolidating lets you combine the debt into one installment with a fixed interest rate that will not change throughout the duration of the loan (or for the duration of the promo period, in the case of a balance transfer card).
It’s not only about simplifying your repayments. Consolidating your debt can provide you with a clear and motivating end goal to be debt-free, particularly if you do not have a strategy that you have in place.
You can build credit
The process of applying for a new type of credit requires a hard credit check, which could reduce your score temporarily by a few points.
If, however, you make your monthly payments punctually and completely, the overall impact should be positive especially if you’re consolidating financial debt with credit cards.
Paying off credit card balances decreases your score. This is one of the biggest elements that determines your score.
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Check if you are pre-qualified for a personal loan and it will not affect your credit score
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The amount of the loan
on NerdWallet
The cons of debt consolidation
It is possible that you will not be eligible to receive a reduced rate
Balance transfer cards are difficult to obtain and generally require good credit (690 credit score or better).
Consolidation loans are more accessible, and there are loans tailored for bad-credit applicants (629 credit score or lower). However, borrowers with the highest scores generally have the lowest interest rates.
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Unless the lender can offer a lower interest rate than the current one and you are able to consolidate your debts, it’s not an option. In this instance, think about other debt repayment strategies such as the other methods.
You could fall behind on the payments
If you miss payments toward this new credit card, you may be in worse situation than you were when you first started.
For example, if you don’t pay off the balance transfer credit during the promotional period of zero interest, you’ll be stuck paying it at a higher APR that could be greater than the initial debt.
If you are in debt in a consolidation loan it is possible to accrue late fees and missed payments will be reported to credit bureaus, which could negatively impact your credit score.
Before consolidating, make sure the new monthly installment fits comfortably in your for the entire payment period.
The root problem
Although consolidation is an effective tool, it isn’t the only solution for ongoing debt and doesn’t address the causes that caused debt in the initial place.
If you are struggling with excessive spending it is a risky option. When you take out an loan to repay credit cards, for example, those cards will have an unpaid balance. You may be tempted to make use of them prior to the new debt is settled and you’ll be in deeper into.
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If you have an outstanding debt, you might be better off contacting an established nonprofit organization that can help you set up a debt management plan rather than attempting to solve the issue on your own.
How do you get an debt consolidation loan
Getting a debt consolidation loan is about comparing the most suitable loan that is typically the one that has the lowest interest. Some lenders will let you know about rates without affecting your credit score.
Three places to find an opportunity to get a debt 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 part at the credit union before applying.
: Banks also offer loans for debt consolidation, but borrowers and customers with excellent or good credit are more likely to be accepted.
Online lenders provide debt consolidation loans to borrowers of all credit brackets. You’ll still want to ensure that the APR is lower than the total rate of interest on your existing credit card.
When you’ve located the ideal loan and are now ready to apply, gather your personal information like identification proof, Social Security number and proof of income to be submitted to complete the application. Many applications are available online and take only some minutes to fill out.
Depending on the lender that you choose, loans can be funded on the same day that you’ve been approved or in a week.
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NerdWallet has evaluated the personal loan products from more than 35 institutions. Below is the list of lenders who offer the best debt consolidation loans.
Lender
Credit bracket
Best for
APR range
NerdWallet’s ratings are determined by the editorial staff. The scoring formula is based on aspects we believe are beneficial to the consumer, such as impact on credit score, fees and rates as well as the customer’s experience and responsible lending practices.
on the Discover website.
Good to excellent.
Fast and quick funding.
6.99% – 24.99% .
NerdWallet’s ratings are evaluated by the editorial staff. The scoring formula considers the factors we believe to be consumer-friendly, including impact to credit score, rates and fees as well as the customer’s experience and ethical lending practices.
on SoFi’s site
Excellent to great.
No fees.
7.99% – 23.43% .
NerdWallet’s ratings are evaluated by our editorial team. The scoring formula is based on aspects we consider to be a good choice for consumers, such as the impact on credit scores rates and fees, customer service 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 is based on factors we consider to be consumer-friendly, including impact to credit score, fees and rates as well as the customer’s experience and ethical lending practices.
on the website of Happy Money.
Fair.
Paying off credit card debt.
7.99% – 29.99% .
NerdWallet’s ratings are evaluated by the editorial staff. 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 customers’ experience, and ethical lending practices.
on Upgrade’s website
Bad.
Direct payment to creditors , with discount.
8.49% – 35.97% .
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 Upstart’s website
Bad.
People with poor credit histories.
6.50% – 35.99% .
Author bio Jackie Veling covers personal loans for NerdWallet.
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