When I ended up in the hospital two years ago, I worried about getting better, not about medical bills. I had great insurance and thought my stay would be covered.
So when I finally got home, I was shocked to get a bill for over $20,000. The amount I owed was way more than I had in savings, so I ended up paying it with my credit cards. I knew it wasn’t smart, but I was out of options.
If you’re in a similar situation and facing a hefty credit card balance, you might feel like you’ve fallen into quicksand, where no matter how hard you struggle, you keep sinking. Credit cards typically have high interest rates, causing your balance to balloon over time. You could end up paying back thousands of dollars more than you originally borrowed.
One solution that can help you take charge of your credit cards is a debt consolidation loan. If you’re motivated to pay off your debt, these loans can help you save money and eliminate your credit card balance faster.
What is a debt consolidation loan?
In the U.S., the average household has a whopping $6,662 in credit card debt. Although all forms of debt can be costly, credit card debt is especially expensive due to high interest rates.
According to the Federal Reserve, the average credit card interest rate was 13.16% in the fourth quarter of 2017. However, some cards can have interest rates as high as 30.00%.
Thanks to interest charges, it can take years to pay off your debt if you only make the minimum payment. And, you’ll pay back thousands more than you originally charged in the first place.
Debt consolidation loans can be a smart tool to accelerate your debt repayment. A debt consolidation loan, also known as a credit card consolidation loan, is a personal loan issued by a bank or financial institution. The personal loan is equal to the amount of your credit card balance and other forms of debt, such as a car loan.
Debt consolidation loans are installment loans, which means you’ll have a set number of payments and an exact payoff date you can circle on the calendar. Even better, debt consolidation loan interest rates tend to be lower than credit cards. Depending on your credit history, income, and amount of debt, you could qualify for a credit card consolidation loan with an interest rate as low as 4.98%.
Using a credit card debt consolidation calculator
In my situation, my credit cards had an interest rate of 15.00%. With a $20,000 balance and a monthly payment of $350, it would’ve taken me over eight years to pay off my cards. With interest charges, I would’ve paid my credit card companies over $35,000.
I decided that a debt consolidation loan was right for me and shopped around with different lenders. I ended up getting a personal loan from SoFi. Although I didn’t qualify for its lowest available rates, I did get approved for a loan at 8.00%, a significant improvement over my credit cards.
With my new loan, I’ll be debt-free in five years. And, I’ll pay back just $24,332 at the end of it, saving me over $10,000.
|Credit Cards||Debt Consolidation
|Repayment Term||8 Years||5 Years|
|Total Interest Charges||$15,000||$4,332|
If you’re thinking about consolidating your debt, you can use the unsecured debt consolidation loan calculator to see how much you’d save by consolidating your debt versus making payments on your credit cards. It’ll also show you how much sooner you’ll become debt-free.
Credit Card Consolidation Calculator
Before After Balance — — Rate — — Term — — Monthly — — Interest — — Balance — — Savings — —
What to know before applying for a debt consolidation loan
Although debt consolidation loans can be useful, they’re not for everyone. They’re a tool you can use to better manage your debt, but they’re not a miracle cure. There are a few disadvantages to debt consolidation you should consider before applying for a loan:
- They don’t address the root cause: A debt consolidation loan doesn’t eliminate your credit card balance; it just moves your credit cards to a new type of debt.
- You may need a cosigner: If your credit is less than stellar, you might not qualify for a low interest rate, or you might not get approved at all. In that case, you might need a cosigner, a friend or relative with excellent credit who acts as a guarantor on the loan, before a lender will approve you.
- Your payments could be unaffordable: If you racked up a lot of debt, switching to an installment loan with a shorter repayment period could increase your payments. For example, my payments would’ve jumped to $905 if I opted for a two-year loan instead of a five-year one. Make sure the repayment term you choose is realistic for your budget.
Before applying for a loan, identify how you racked up a credit card balance in the first place and develop a strategy for paying off the loan if you’re approved. You might have to make some drastic changes to your lifestyle, such as launching a side hustle or getting a roommate, to make credit card consolidation effective for you.
Managing your debt
If you’ve done your homework and understand the benefits and drawbacks of a debt consolidation loan, it’s wise to shop around and get offers from multiple lenders to find the best deal. You can compare rates from multiple lenders at once without affecting your credit score.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|5.81% – 15.37%1||$5,000 - $100,000||Visit SoFi|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|