Payday is supposed to be a happy day. It’s supposed to serve as a pat on your back for all the hard work you’ve put in to earn that check.
But for people who have debt piling up to the sky, payday is anything but happy. It’s not easy looking at your paycheck knowing that only some of it belongs to you.
From the moment you receive your paycheck, it’s only a matter of time before a huge chunk of it disappears because of debt payments. Or maybe debt collectors are already calling and you’re on the brink of bankruptcy.
Either way, you need relief fast.
Debt consolidation could be the answer you’re looking for. Let’s find out.
How debt consolidation works
When you consolidate your debt, you are combining all of your existing debt into one single loan. Your old loans are marked as paid off and the balances are combined into the new loan. Having one loan means having only one payment.
Consolidating your debt will give you a lower interest rate, which, in turn, will reduce your monthly payment amount. With a lower amount and only one loan to pay off, it’s easier to make consistent, on-time payments each month.
The goal is to save money and pay off your debt faster by taking advantage of a loan with a lower interest rate.
To illustrate, assume you have the following outstanding debts:
- Credit card 1:$5,000 balance, a 23.49% APR, and a $150 minimum payment
- Credit card 2:$7,5000 balance, a 21.49% APR, and a $200 minimum payment
The charts below compare the interest payments and time it will take to pay off both cards by only make the minimum payment to using a debt consolidation loan. Notice how much you can save in interest payments if you get a $12,00 fixed rate loan to consolidate the debt.
Should you consolidate your debt?
It depends on your circumstances and level of self-discipline. “If the root cause of the debtor’s debts arose from a one-time event which is not likely to recur, [it may be worthwhile],” notes consumer rights lawyer Donald E. Petersen.
But it may not be an effective way to deal with overwhelming debt if you’re not disciplined with your spending or continue robbing Peter to pay Paul, Petersen adds.
Calculate your level of debt and determine how long it will take you to pay it off. If you can pay off your debt within three to five years with a debt consolidation, it could be a great choice for you.
It can also be a good idea if your unsecured debt is less than half of your gross income.
Your credit score matters
Your credit score also plays a significant role in debt consolidation. The goal of consolidating your debt is to get a lower interest rate and monthly payment– it could save you thousands of dollars.
But you need to have good credit to get an interest rate that will allow you to reap the benefits of debt consolidation.
|Secured Credit Card||$35 annual fee (plus security deposit)||Apply|
|Secured Credit Card||$29 annual fee||Apply|
If you can’t get a lower rate by consolidating your debt, it may not make sense for you to go this route. And the chances of being offered a good interest rate with bad credit aren’t high. But it’s not impossible.
If you can wait to consolidate your debt until you’ve improved your credit score, great. You’ll have more success being offered a loan with a good interest rate.
But if you don’t want to take the time to rebuild your credit, there are other consolidation options you can consider.
What method should you use to consolidate your debt?
Debt consolidation is typically achieved using credit cards, home equity lines of credit (HELOC), or personal loans. Debt consolidation loans can be either unsecured or secured. The latter requires some form of collateral.
1) Personal loan
You don’t need stellar credit to qualify for a personal loan, but the most competitive loan offers are reserved for borrowers with excellent credit. Lenders look at your credit score to assess risk and help determine what interest rate to offer.
| Pros|| Cons|
Before applying for a personal loan, be sure to compare rates and terms offered by various lenders.
To get started, use SuperMoney’s loan offer engine to request personalized rates and narrow down your best options (this will not affect your credit score).
Featured lenders for personal loans
|Lending Partner||Minimum FICO score||Estimated APR|
|600||15.49% – 34.99%*||Apply|
|680||4.99% – 14.24% (with AutoPay)*||Apply|
5.49% – 14.29% APR (with AutoPay)*
4.98% – 11.44% APR (with AutoPay)*
|660||5.99% – 35.89%*||Apply|
|620||4.93% – 29.99%*||Apply|
|580||9.95% – 35.99%*||Apply|
|700||5.25% – 12%*||Apply|
Then, head over to our personal loans reviews page to compare the rates and terms from those lenders, as well as other top lenders.
2) Balance transfer credit card
If you have good credit, you may want to explore balance transfer credit cards.
Upon approval, you can transfer your outstanding balances to the new card and enjoy a 0% promotional APR, ranging from 12 to 24 months, depending on the card.
| Pros|| Cons|
Do you have equity in your home? A home equity line of credit may be a feasible option to take care of the overwhelming debt. But make sure you know the rates, terms, and closing costs of various lenders before committing.
| Pros|| Cons|
Are you ready to consolidate your debt?
That may seem like a simple question to answer, but that isn’t the case for everyone. I know you’re ready to lower your interest rate and monthly payment– who isn’t? But that doesn’t mean you’re ready to consolidate your debt.
If debt consolidation isn’t done the right way, you won’t reap the benefits from it. In fact, it might make things worse for you. Don’t jump the gun too quickly. Do your research before committing.
Our personalized loan offer tool will help you make the right decision for your unique situation (without affecting your credit score). You’ll receive personalized offers from top lenders, putting you one step closer to finding the best solution to paying off your debt.