Thousands of Americans have a lot of debt including credit cards, car loans, student loans, and mortgages. It can be rather challenging to get rid of it and make on-time payments. Among the top options for dealing with debt, consumers may choose to get a debt consolidation loan or work with lenders to settle the debt with the help of a home equity line of credit.
If you are planning to repay numerous debts by combining the monthly payments into one, you may choose a debt consolidation loan. This variant may offer you lower interest rates. Despite the fact that it’s a more affordable option, you should consider both benefits and drawbacks of debt consolidation.
The Basics of Debt Consolidation
What does this option mean? This is the process of combining several debts into a single larger debt with lower interest. Borrowers who are burdened with a huge amount of high-interest debt can take this step and benefit from it. In other words, you combine multiple types of debt including loans, credit cards, medical debt, car loans, or any other debt into one monthly payment. So, you don’t need to remember making numerous monthly payments anymore.
Many people seek 1000 dollar guaranteed approval unsecured credit cards for bad credit but it can be tough to find this lending offer especially if your rating is below average. Debt consolidation doesn’t just simplify your finances but also gives consumers more reasonable lending conditions at a more favorable interest rate.
The borrower begins the process of loan consolidation by securing the new loan at a lower interest rate. The new creditor will issue the money for you to pay some or all of the existing lenders off. This process is meant to simplify the life of borrowers.
Reasons for Using Debt Consolidation
Before you decide if you really need to consolidate your debts, you need to evaluate your financial goals. There are several reasons for debt consolidation. According to the New York Federal Reserve, American consumer debt reached $14.96 trillion in the second quarter of 2021.
This debt includes mortgages, credit cards, auto loans, and student loans. Many citizens and residents can’t manage their huge debt which makes them search for other options instead of trying to chip away that mountain of debt. Here are the main reasons to use debt consolidation:
- Lower monthly payments. If you choose debt consolidation, you will be able to reduce your monthly payments or make the repayment term longer.
- Reduce interest rates. Those who are eligible for a new lending option at a lower interest rate can save funds on debt repayment.
- Change loan providers. Debt consolidation also lets borrowers change their lenders if they don’t like their current service provider.
- Simplify repayment. When you have one loan instead of several ones, you only get one payment to make each month. So, there is no need to worry about late or missed payments.
- Boost your credit. The debt consolidation may initially lower your credit rating a bit. The reason for that is that lenders will conduct a hard credit pull. However, the credit score will improve over time due to on-time payments.
Should I Consolidate My Debt?
There is no one-size-fits-all answer to this question as it depends on the circumstances of each client. It may be a reasonable decision provided that:
- You prefer fixed payments. Those who would like their repayment term, interest rate, or monthly payment to be fixed, can benefit from getting a debt consolidation loan.
- Your credit rating is good enough. If your credit score is not lower than 670 you have more chances of securing a lower interest rate and saving your finances.
- You want one monthly payment. Another common option for using debt consolidation is to obtain one monthly payment so that you don’t keep track of numerous payments.
- You can afford to pay the loan off. If a borrower can afford to pay the debt off, getting a debt consolidation loan will be a suitable choice.
Alternatives to Debt Consolidation Loans
You may also want to look at other options apart from debt consolidation to change the conditions of your debts and loans. Here are some alternatives.
This is a similar process to consolidation. You also take out a new crediting option but there is no need to consolidate numerous debts to refinance. A client may secure a new debt to repay a single old debt. For instance, consumers can refinance their mortgage to a lower rate or request a cash-out refinance loan to tap into the equity of their home.
Renegotiate the Conditions of the Current Loan
Those who experience issues with debt repayment may try to negotiate the new lending conditions of their existing loan. Even when your credit rating is less-than-stellar to qualify for a debt consolidation loan, you may still benefit from negotiating the new terms.
Credit card holders can transfer the balance from one or several cards to a new balance transfer card with low promotional interest. It may give you a 0% APR for a limited time. After the promotional period is finished, the rate may rise rapidly so be careful. Many service providers claim a fee of 5% of the sum transferred that will be tacked on to the balance.
A Debt Management Plan
A nonprofit credit counseling organization can offer you a debt management plan. It involves having a credit specialist negotiate with your lenders on your behalf and closing your current credit cards. After that, a new payment plan is worked out for multiple debts you are having.
The Bottom Line
If a consumer is eligible for a lower interest rate than he or she is currently paying and doesn’t extend the repayment term too much, debt consolidation can make sense and make the repayment process easier and cheaper.
A good credit score and proof of steady employment are needed to qualify for a debt consolidation loan at a lower rate. However, you need to be careful when you decide to change an unsecured loan, such as credit card debt, to a secured one such as a home equity loan. You may risk losing your valuable asset in case of a default.