Is a Debt Consolidation Loan for You?
Are you struggling to stay above water with your debts? Don’t worry, you are not alone— many people are going through the same problem, from credit card debt to home, auto loans and personal loans. A report from Experian shows that the average U.S. household carries at least three credit cards— but that’s not all— each with a balance of almost $5,000 for a total credit card debt of over $14,000.
Another common action is paying the minimum amount due on each debt every month. All of these can make it impossible for you to ever repay your debts— but don’t worry, there is an option for relief. Consolidating your loan debts can provide financial relief by lowering your monthly payments.
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This could be the answer you were looking for to your debt relief— if you’re considering it— here’s what you need to know.
What Is a Debt Consolidation Loan?
A debt consolidation loan is one single loan that captures all your debts into one monthly payment. It will become one overall loan.
Basically, this type of loan provides you enough money to pay off multiple debts. The total amount you owe in current debts is combined into a single loan with one monthly payment. The typical debts it pays off are for credit cards, payday loans, and medical bills. The big plus to making a debt consolidation loan is that very often they come with reduce interest rates and will lower your monthly payment.
It will simplify your debts and instead of paying different individual loans every month, you’ll just do one loan payment. Also, you may be able to pay off this loan quicker since you will be paying a lower interest rate and a lower monthly amount.
But keep in mind, as any loan a debt consolidation loans will come with pros and cons. Review the following benefits and disadvantages of these loans before making a decision, make sure if this is the right solution for you.
- All debt is captured into one loan and one monthly payment
- Simpler way to make on time payments
- No changes in your monthly loan payment
- Lower interest rate
- Interests you pay can be tax deductible
- Debt consolidation loans could require collateral (home, vehicle, etc.)
- If you have bad financial habits, you could make the mistake of taking on more debt because you feel comfortable with your reduced debt
- Can temporarily lower your credit score because it requires a hard inquiry
- It can include fees
Debt Consolidation Loan or a Balance Transfer Card?
Another consolidation option you might have heard of is a balance transfer credit card. These are commonly offered to people with credit card debt or other debts as a way to get your credit card balance onto a new credit card with lower interest. These cards may sound great, but they are different from a debt consolidation loan. They can be a smart or ill-advised option.
A debt consolidation loan can be used to pay off any outstanding debts and balances, but a balance transfer card will only take care of credit card balances. This method can’t be used for other types of debts, like car loans or student loans.
These cards also come with a catch. There are times where they add a transfer fee— this reduces the potential benefits— you might have to pay money on top of the debt you’re transferring— that’s not awesome. Another way they use to attract customers is to offer an introductory no-interest or low-interest rate for a fixed amount of time following a balance transfer.
The downside is that ones the promotional time is over the interest rate can jump dramatically and leave you paying incredibly high interest on your debt. This will dramatically increase the amount you’re paying on your debt.
If you have different types of debt and aren’t able to pay them off entirely within just a few months, then often times a debt consolidation loan is the smarter solution. Also, by having a substantially lower interest rate you would be able to pay more on your monthly payments and have it applied to the principal. This would help you pay off the loan quicker. You’ll be able to lower your payments, take your time, and still improve your financial situation.
How to Choose a Debt Consolidation Loan
Ok, now that you understand what debt consolidation loans is, you’re ready to choose if this is right for you. If the answer is yes, then now you have to choose which debt consolidation loan and lender is the best.
You have to first research which kinds of loans you qualify for. An online search is always a best bet. Look for debt consolidation loans that are available for your debt amount, your specific debt type, and your credit score. It is important to compare the different loan terms and options to make a smart choice.
It is also important to consider the current interest rates, each loan comes with different interest rates that depend on your history and credit score.
Average Debt Consolidation Interest Rates
Debt consolidation loan interest rates will vary. These can be based on credit scores, current interest rates, or the terms of your chosen loan. The current average annual percentage rate on debt consolidation loans is 18.56%. The average range for interest rates on these types of loans can be as low as 8.31%.
Then again, these are averages, interest rates can also be lower or higher than this ranges. It will depend on your credit score or other factors.
In the end your interest rate is what will affect how much you’ll pay in total. That’s why is important for you to compare and consider the interest rate of every debt consolidation loan. Always take into consideration the interest rates, loan terms, repayment options, fees and penalties if any. You can— and should— ask your lender to show you how much interest you’ll pay over the the loan’s life. It’s important to always remember to be sure you’re getting the best deal— you can always apply to multiple lenders.