Debt consolidation involves taking out a new loan to repay several loans, which simplifies repayment and potentially reduces the total cost of the loan. Take our 3-minute quiz and talk to an advisor today. Founded in 1976, Bankrate has a long history of helping people make smart financial decisions. We have maintained this reputation for more than four decades by demystifying the financial decision-making process and giving people confidence in the actions to take next.
The best balance transfer cards typically have zero interest or a very low interest rate for an introductory period of up to 18 months. This allows you to transfer high-interest rate credit card balances and other debts to the new card. The idea is to pay the full balance before the promotional APR period ends. Otherwise, you risk accumulating even more interest than you had at the beginning.
Using a credit card with a balance transfer is best for those who are disciplined and will avoid using their existing credit cards once the balances have been transferred to the new card. If you choose to use a credit card with a balance transfer, have a plan to pay off the debt before the initial credit card rate is due. You will use all or part of the income from the loan to pay the balances of the debts you want to consolidate. Like a credit card with a balance transfer, instead of paying each creditor monthly, you'll now make a single monthly payment on the personal loan to streamline the debt repayment process.
In addition, the eligibility requirements for P2P loans aren't always as stringent as other types. Some P2P lenders allow applicants to qualify with a lower credit score. Before using this type of loan, compare fees and interest rates with other options. P2P lending may be a good option if you have a lower credit score or a limited credit history.
However, as with a debt consolidation loan, make sure that the total amount you pay is less than what you're already paying to your current creditors. If you want debt consolidation options that don't require applying for a loan or applying for a credit card with balance transfer, a debt management plan might be right for you, especially as an alternative to bankruptcy. There are several ways to consolidate or combine your debt into one payment, but there are a number of important things to consider before moving forward with a debt consolidation loan. Debt consolidation means that your various debts, whether credit card bills or other loan payments, are included in a single loan or monthly payment.
If you have multiple credit card or loan accounts, consolidation can be a way to simplify or reduce payments. Find out why you're in debt. It's important to understand why you're in debt. If you have accumulated a lot of debt because you spend more than you earn, a debt consolidation loan probably won't help you get out of debt unless it reduces your expenses or increases your income.
Banks, credit unions, and installment loan lenders can offer debt consolidation loans. These loans convert many of your debts into a single loan payment, simplifying the amount of payments you have to make. These offers may also be for lower interest rates than what you are currently paying. Many of the low interest rates on debt consolidation loans can be “preliminary” rates that only last a certain amount of time.
After that, your lender can increase the rate you have to pay. With a home equity loan, you borrow from the equity of your home. When used for debt consolidation, you first use the loan to pay existing creditors and then you have to repay the home equity loan. Home equity loans may offer lower interest rates than other types of loans.
However, using a home equity loan to consolidate credit card debt is risky. If you don't pay back the loan, you could lose your home in foreclosure. Closing costs can be in the hundreds or thousands of dollars. The loans you apply for to consolidate your debt may end up costing you more in fees and higher interest rates than if you just paid off your previous debts.
In addition, if debt problems have affected your credit rating, you probably won't be able to get low interest rates on the balance transfer, the debt consolidation loan, or the home equity loan. The types of loans that can be used for debt consolidation are unsecured personal loans, secured personal loans, and home equity loans. You can also use other methods to consolidate debt, such as a balance transfer, a credit card, or a home equity line of credit. Also called credit card refinancing, this option transfers credit card debt to a balance transfer credit card that charges no interest for a promotional period, often 12 to 21 months.
You'll need good to excellent credit (credit score of 690 or higher) to qualify for most balance transfer cards. A good balance transfer card won't charge an annual fee, but many issuers charge a one-time balance transfer fee of 3 to 5% of the amount transferred. Before choosing a card, calculate if the interest you save over time will eliminate the cost of the fee. Credit unions are not-for-profit credit institutions that can offer their members more flexible loan terms and lower rates than online lenders, especially for borrowers with fair or bad credit (credit score of 689 or less).
The maximum APR charged by federal credit unions is 18%. Most online lenders allow you to prequalify for a credit card consolidation loan without affecting your credit rating, although this feature is less common among banks and credit unions. Prequalification gives you a preview of the rate, the amount of the loan, and the term you can get once you submit the formal application. A HELOC often requires interest-only payments during the drawing period, which is usually the first 10 years.
That means you'll have to pay more than the minimum payment due to reduce your principal and reduce your total debt during that time. If you have an employer-sponsored retirement account, such as a 401 (k) plan, it's not recommended to apply for a loan with it, as this can significantly affect your retirement. Consider it only after you've ruled out balance transfer cards and other types of loans. In addition, 401 (k) loans typically expire in five years, unless you lose your job or quit; then they are due on the day of your tax return the following year.
Debt management plans bundle several debts into one monthly payment at a reduced interest rate. It works best for those who have difficulty paying off credit card debt but don't qualify for other options because of a low credit score. Unlike some credit card consolidation options, debt management plans don't affect your credit rating. If your debt represents more than 40% of your income and you can't pay it back within five years, bankruptcy may be a better option.
You can find a debt management plan through a non-profit credit counseling agency. Property and accident insurance services offered through NerdWallet Insurance Services, Inc. OK9203 Property & Accident Licenses. Low credit rating requirements (most Avant borrowers have scores between 600 and 700).
Debt consolidation might be a good idea if you can get a lower interest rate than what you're currently paying with all your debts. That said, there are personal loans with bad credit, but interest rates may be too high for consolidation to be worthwhile. If you're considering ways to consolidate debt, there are several different types of products that allow you to do so, but for each of them, there are important things to consider before moving forward. If you're interested in a personal loan to consolidate debt, check out the free prequalification tool on WalletHub.
Increase your credit rating Paying off your credit card debt with a loan can have an immediate effect on your credit rating by reducing your credit utilization rate. The best way to consolidate depends on how much debt you have, your credit rating, and other factors. You still receive all of your creditors' statements, so it's easy to keep track of how quickly your debt is being paid. Whatever the initial effect on your credit rating, debt consolidation can help you increase your credit rating in the long term.
For example, many don't allow student loan consolidation and some lenders specialize in just one type of consolidation (e.g. Depending on the lender, you may be able to apply for a debt consolidation loan online, over the phone, or in person. .