If you have balances on several high interest credit cards, owe money on student loans, have one or more payday loans, a car loan, or even medical debt, you may be looking for better ways of managing them. Debt consolidation is one option you may consider.
Debt consolidation is the act of replacing one or more smaller debts with a new loan or credit account. Through debt consolidation, you may be able to get a lower interest rate and a lower monthly payment on your debt. This can make repayment easier on your finances and cheaper overall. However, you could also use debt consolidation to extend your repayment term to simply lower your monthly payments to free up space in your budget for other responsibilities.
That said, if you are struggling with your existing debt or are looking to lower the total cost of it, you may consider debt consolidation. Here’s what you should know about it.
Debt consolidation 101: What you should know
You have various options for consolidating debt
Once you decide to consider debt consolidation, you have several borrowing alternatives available to you. Which one you select may depend on how much you owe and how good your credit is.
Personal loans. A common debt consolidation option is to use a personal loan from a bank, credit union or online lender. Repayment on these loans is typically over a three- to five-year period.
Since most personal loans are unsecured — meaning you don’t put up any collateral — interest rates will be higher. But if you are consolidating high interest debt from several credit cards, the personal loan rate may be less than what credit card companies are charging you.
0% APR credit cards. Many credit cards offer 0% interest on new purchases or on balance transfers for periods between 12 and 18 months or longer. Fees for transferring your balance range between 1% and 5% of the balance you transfer. (Some cards offer low promotional fees, so keep an eye out for these deals.) These cards can be an excellent way to consolidate smaller debts from several high-interest credit cards and try to pay them off before the 0% promotional rate expires.
Balance transfer credit cards. Sometimes one of your existing credit cards (or a new one) will offer a low or 0% promotional interest rate on balance transfers from another card. These promotional periods can be as long as 18 months or more. All you need to do is register online, tell them which balances you want to transfer and they will take care of the rest. As mentioned above, many of these same cards offer no interest on purchases as well.
Home equity loans. This option isn’t for everyone. First, you need to own a home and have enough equity to borrow against your house. (Most lenders won’t lend you more than 80% of your home’s value when you combine the amount you want to borrow with the balance on your original mortgage.)
If you have equity, however, this can be the best way to consolidate your loans and secure both a lower interest rate and a lower monthly payment. In fact, a survey by TransUnion says 41% of home equity borrowers use home equity loans to consolidate debts from other credit products.
But there are disadvantages. Home equity loans typically have terms of 10 years or more, which means you will be paying for much longer. And, of course, you run the risk of losing your home if you don’t make the payments
Debt consolidation could lower your interest rate or extend your repayment term
Debt consolidation has several advantages, including a lower interest rate and an extended repayment term, which could lower your monthly payments.
Lower interest rate. A review of LendingTree’s website showed credit card interest rates ranging between a low of around 14% and a high of more than 27%. (Disclosure: Student Loan Hero is owned by LendingTree.) In most cases the lower rates are for people with good credit and a good repayment record.
With rates this high, it isn’t hard to find a lower interest rate on a personal or home equity loan. In February 2019, rates on home equity loans were in the 7% to 8% range depending on credit rating, according to data from LendingTree, which owns Student Loan Hero. Home equity lines of credit, where you have the ability to draw up to a certain amount over a period of years and then repay it had somewhat lower rates, as low as 5%. A lower rate is an almost certain advantage of consolidating your debt.
Extended repayment term. Consolidating your debt will likely involve repaying it over a longer period of time. While no interest credit cards are generally short-term solutions involving repayment over 12 to 18 months, personal loans may have repayment terms as long as 10 years and home equity loans can be for as long as 30 years depending on what kind of loan you negotiate.
Because you are paying back the loan over a longer period of time, your monthly payment is likely to be lower as well. But keep in mind the total interest you are paying in deciding if repaying credit card and other short-term debt over 30 years is a good idea.If possible, keep paying your prior higher monthly payment so you can pay the loan off quicker.
Is debt consolidation right for you?
As with any financial decision, pursuing debt consolidation has both pros and cons:
- You could score a lower interest rate than you are currently paying.
- You could make lower monthly payment than you are paying now.
- You might see a bump in your credit score. If you use your debt consolidation to pay off smaller credit card balances and other debts, the result could boost your credit rating.
- Depending on the type of loan you take out to consolidate debt, you may have to pay fees, such as an origination fee.
- If you stretch out your repayment term, you could pay more in interest charges by consolidating debt.
There are many available options to consolidate debt and you may wonder if you are making the right decision. If you decide that debt consolidation is the best option for you, make certain you are working with a reputable lender. If you still can’t decide how to proceed, consider talking with a credit counselor who works with a nonprofit credit counseling agency.
You may also consider working with a credit counselor certified by the National Foundation for Credit Counseling. It might recommend a debt management program (DMP), which offers benefits similar to debt consolidation without needing to get a new loan. With a DMP, you make a single monthly payment to the nonprofit agency you are working with, which distributes it to your creditors. The agency works with those creditors to secure lower interest rates and lower monthly payments.
The bottom line
Consolidating multiple loans and other debts with a single lender has the potential to save you money and make it easier to repay these obligations.
But make sure you do your research no matter what option you choose. You want to select the right repayment vehicle (no-interest credit card, personal loan or home equity loan) and have a credit rating that makes the option you choose possible. If everything works out, you will likely to find your debt easier to repay. And, with a lower interest rate, less expensive in the long run.
Interested in a personal loan?Here are the top personal loan lenders of 2019!
|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 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. 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 the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. 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. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
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.
|5.74% – 16.99%1||$5,000 - $100,000|
|7.54% – 35.99%||$1,000 - $50,000|
|7.99% – 35.89%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|5.99% – 29.99%3||$7,500 - $40,000|
|6.79% – 20.89%4||$5,000 - $50,000|
|9.99% – 35.99%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|