What can you do if you are up to your eyeballs in debt? Some people get a debt consolidation loan to ease their financial burdens.
- Should you take out a personal loan to consolidate your debt?
- Is a personal loan a better option than transferring balances to a new credit card with a lower interest rate?
- If you decide on a personal loan, what types of personal loans are available for debt consolidation?
Read on for the answers to these and other questions.
If you are feeling the pinch of a tight monthly budget, you are not alone. Many people live paycheck to paycheck, unable to figure out ways to save money while swimming in an ocean of debt. A recent report by The Federal Reserve indicates that the average American household that carries a credit card balance owes approximately $15,700 in credit card debt alone.
Credit card debt can be disastrous for your financial well-being. According to the report mentioned above, some card owners carry interest rates of over 20 percent. However, the national average annual percentage rate is a little over 15 percent. If you carry a high balance on your credit cards, the interest rate can be brutal. For example, just the minimum payments (interest plus 1% of debt balance) on a $15,700 credit card debt would be $419 a month. And If you “only” make minimum payments, it would take you over 32 years to repay. Not to mention a total of $25,557 in interest.
What is Debt Consolidation?
Debt consolidation allows qualified consumers to take out a new loan that pays off most or all their outstanding debt. The purpose of debt consolidation is to combine all your existing debt from various sources into one loan.
This means that you only have to pay one loan payment a month instead of several smaller loan payments. Debt consolidation loans usually have a lower interest rate than the rates you are currently paying. A debt consolidation loan may even reduce your monthly loan payments.
What Options are Available for Debt Consolidation?
So, what can you do to consolidate your debt? It boils down to three main options. You can:
- Transfer all your other credit card balances to one card
- Get a personal loan
- Get a personal line of credit
Which of these options makes the most sense for you? That depends on your financial situation.
Should You Use a Credit Card to Consolidate Debt?
It may be tempting to respond to a credit card offer you get in the mail that promises a low introductory annual percentage rate. Paying a lower interest rate for an introductory period will save you money. At least in the short term.
If you have high balances on your existing credit cards, you may not qualify for the low introductory interest rate promotion. Even if you do qualify, you may not get a credit limit high enough to actually consolidate all your other credit card debt.
If you do qualify for the low rate and the high credit limit, will you be able to pay off your entire balance before the introductory period is over? If so, applying for a new credit card may be a good idea.
If not, you have to figure out whether the interest rate you will have to pay at that point leaves you in a better position than you currently have.
Another thing to consider is your own level of self-control. Will you be able to resist the temptation to pile on more credit card debt if you get a new credit card? If you have any doubt about your willpower you may want to avoid having access to a higher credit limit.
How Can You Find the Best Credit Cards for Debt Consolidation?
There are thousands of credit card offers available to consumers. Finding the right card for debt consolidation can be a challenge. SuperMoney has prepared reviews for top personal credit cards based on expert and user feedback, which you can access here.
Should You Get a Personal Loan for Debt Consolidation?
Often, when you weigh the potential outcomes of getting a new credit card to pay off existing credit cards, you may find that a personal loan is a better option for debt consolidation. The advantages of a personal loan include:
- Lower interest rates
- Set monthly payments that make budgeting easier
- Lower monthly payments
- You can be debt-free faster
A personal loan used to consolidate debt is a smart move if:
- You are struggling to make the minimum payments on your credit cards
- You have not been able to negotiate lower interest rates with your credit card companies
- You have too many bills to handle each month
Before you choose a personal loan, though, there are some things to consider. Can adjustments to your budget help you pay down your credit card balances? If so, you may not need to take out a loan.
Related article: 5 Best Credit Cards to Consolidate Debt
Credit card calculators can help you determine which cards to pay off first to get the most financial benefit. Some people find that paying off the highest rate card first is better. Other people find that concentrating on the card with the lowest balance is more effective. This approach can provide quick results and help keep you motivated.
If you decide that a personal loan is a better option for you, there is another benefit to consider. With a personal loan, you can consolidate debts other than credit card debts as well. If you owe small amounts of money to multiple creditors, a personal loan can simplify your monthly bill paying considerably.
What Different Types of Lenders Offer Personal Loans?
If you are thinking about consolidating your debt with a personal loan, you can explore options through both online lenders and banks or credit unions. Online lenders have competitive rates and are usually easier to qualify for.
Your bank or credit union may offer you options for a personal loan or a line of credit. Since unsecured personal loans do not require any collateral to secure the loan, they generally carry a larger interest rate. Secured loans require collateral but typically offer a lower interest rate.
When comparing loans from banks and credit unions, be sure to note whether the rate is fixed or variable. A fixed rate loan may be slightly higher than a variable rate loan. It is important to note, though, that a fixed rate will never fluctuate. A variable rate may increase or decrease over time. This means that if you have a loan term of more than a couple of years, you may want to consider how your rate might change before choosing a variable rate.
How Can You Benefit from a Debt Management Plan?
Many lenders who offer debt consolidation loans also provide a debt management plan for you. A debt management plan is designed to help you regain control of your finances while paying down unsecured debt.
It is important to note that a debt management plan may not always work to your advantage. You will need to carefully consider the terms of any debt management plan proposed by your lender before agreeing to enroll in such a plan.
How Can You Find the Best Lender for Debt Consolidation?
There are a number of factors which will help you find the best lender for your particular situation. You will need to consider such things as whether the lender:
- Charges an origination fee for the loan
- Charges for late fees and missed payments
- Charges a pre-payment penalty
- Offers a lower interest rate with a co-signer
- Offers financial counseling and tools to help you better manage your debt
Using all the tools available to you will help you get out of debt faster and stay debt-free for the long term. If you are ready to get a better hold on your financial future, check out our expert and consumer reviews to find the best rates and terms on personal loans.
What If Debt Consolidation Is Not An Option?
Although debt consolidation can be a good debt relief method, it isn’t always a viable option. If you have bad credit or don’t own a home, you probably won’t qualify for a consolidation loan. Even if you do qualify, you may not be able to afford the payments. In such cases, you need a more aggressive debt resolution strategy, such as debt settlement.
A debt settlement allows debtors to negotiate a reduction of their debt balance in exchange for a lump sum payment. This is a great way to reduce your debt, but it may hurt your credit and it doesn’t necessarily stop collections until the debt is completely settled, which could take many months. The good news is that, unlike bankruptcy, there are no upfront fees. Debt settlement firms will not charge you a dime until they save you money by settling an account.
Click here and get a free consultation with a debt relief specialist. The debt relief specialist will make a recommendation based on your personal financial situation. There is no obligation to follow the advice and it won’t hurt your credit to check your options.