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Debt consolidation can help you save money, reduce stress, and break free from debt. Compare different consolidation solutions to find the one that fits you best.
What is Debt Consolidation?
Debt consolidation combines multiple debts into one debt with a new creditor.
You pay off your current debts with the money from a loan or credit from a new account. Debt consolidation can reduce your total costs to pay off debt with the convenience of making one monthly payment.
The most common options include debt consolidation loans and credit card balance transfers. Other ways you can consolidate debt are through a home equity mortgage or a debt relief program that consolidates your monthly payment.
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What are Your Debt Consolidation Options?
Debt consolidation can be the right solution, whether you are looking to lower your monthly payment or pay off your debt at the lowest cost. Here are four ways you can consolidate debt:
Debt Consolidation Loans
Borrow up to $100,000
Combine your credit card debts, medical bills, personal loans, and other types of debt into an affordable monthly payment.
Transfer amount based on available credit lines
Pay off high-interest credit cards, store cards, and retail cards with a new card’s low-interest introductory APR.
Borrow based on your available home equity
Pay off your current debts with one long-term mortgage loan allowing you to enjoy a low-interest rate and low monthly payments.
Debt Relief Options
Create an affordable monthly payment
If you are struggling with monthly payments, have bad credit, or in financial hardship, then look for other options to consolidate your monthly payment.
Should I consolidate debt?
Debt consolidation is a great way to improve your financial situation.
The main reasons to consolidate debt are to save money, lower your monthly payment, and reduce your financial stress. Do any of these describe your situation?
Want to save money, can afford a large monthly payment
- Debt consolidation loan
- Balance transfer to 0% or low-rate credit card
Want a smaller payment, have home equity
- Cash-out refinance mortgage
- Home equity mortgage
Struggling to keep up with minimum monthly payments
- Debt Management Plan
- Debt Settlement
How Debt Consolidation Works?
List your debts:
Put down your balances and interest rates for your credit cards, medical debt, and personal loans.
Know your situation
Your credit score, home equity, and the amount you can afford to pay each month determine which solutions you can qualify for.
Stick to the plan
Choose a plan and stick to it.
What are the benefits of Debt Consolidation?
Choose the consolidation option that has the benefits you value most.
- If you qualify for a consolidation loan that lowers your interest, you will lower total cost.
- A 0% or low-interest rate credit card balance transfer can save you money if you pay down your debt during the low-interest period.
Lower your monthly payment
- You will get a dramatically lower monthly payment when you consolidate debt in a new 30-year home loan.
- Debt relief options that consolidate your payments can significantly reduce your monthly payment.
Get out of Debt Faster
- A short-term debt consolidation loan puts you on the course to pay off your debt quickly.
- Debt relief options generally pay your debt off in five years or less with one monthly payment.
How to consolidate debt with bad credit
Consolidating debt with bad credit is challenging. A combination of too much debt, low credit score, and unaffordable payments limit the debt solutions you can choose. The good news, however, is that there are alternatives that can help you pay off debt and get back on track.
One alternative is a bad credit personal loan. Expect to receive a high-interest rate. Only take a loan that has lower interest than your current debt. A bad credit loan is a stop-gap measure. If you pay off your debt and make your loan payments on time, your credit score will rise and you can look for a lower rate loan in a year.
If you can't afford the loan payment or if the interest rate is higher than the debts you want to consolidate, then look for bad credit debt consolidation options that consolidate your payments into one affordable monthly payment.
People also ask
How long do debt consolidation loans run?
Repayment terms generally range from 2 to 6 years, though the exact range varies from lender to lender. If a lender approves you for a loan, it will almost always offer a better rate for a shorter length loan. A shorter time to pay off the loan will give you a larger monthly payment.
What type of loans can I consolidate?
The first step is to list the amount owed on your monthly unsecured bills. Add the bills and determine how much you can afford to pay each month on them. Your goal should be to eliminate debt in a 3-to-5 year window. Reach out to a lender and ask what their payment terms – interest rate, monthly payment, and the number of years to pay it off – would be for a debt consolidation loan. Compare the two costs and make a choice you are comfortable with.
How do I get a debt consolidation loan with a high debt to income ratio?
A high debt to income ratio is a barrier to getting a debt consolidation loan. If you have good credit, then some lenders may make an exception. Other lenders will consider offering a debt consolidation loan if you provide a co-borrower. If you own property and reduce your overall DTI to about 45%, then a home mortgage loan is another possibility. You can also consider other alternatives, such as a debt management plan or debt settlement.
How does debt consolidation affect your credit?
Applying for a loan results in a hard pull, which hits your credit, generally resulting in a small drop. Some lenders use a hard pull to prequalify you, but you can find lenders that will use a soft pull for the prequalification, which does not affect your credit score.
Over time, a debt consolidation loan can improve your credit score. If you don’t run up new debt on the cards, pay off and make your loan payments, then you will boost your score by improving your credit utilization and having a more varied mix of types of credit on your report.
What are the cons of debt consolidation?
You can harm yourself in a few different ways in the debt consolidation process. You can take a loan that you can’t afford to pay. You can run up new debt, not use the funds to pay off the debt you planned to consolidate, and you can harm your credit by shopping for loans with lenders that do a hard pull when you keep getting turned down.
Learn more about the pros and cons of different debt consolidation solutions.
What credit score do I need for a debt consolidation loan?
It is hard to find lenders who will make a debt consolidation loan to borrowers with credit scores less than 600 and even harder below 580. If you have bad credit, then consider other debt consolidation solutions.
The credit score that one lender requires may not be the same as another lender. One reason for that is that lenders tend to focus on part of the market. For example, there are lenders that target customers with excellent credit. Their minimum credit score can be very high, where a lender that focuses on making loans to borrowers with fair credit will accept you with a much lower score. Find out your score before you start shopping and focus on lenders who specialize in borrowers with similar scores.
Is it smart to consolidate debt?
Debt consolidation can be a great idea. It should help you achieve an important financial goal such as saving money, lowering your monthly payment, or reducing your financial stress. The smartest way to consolidate debt is to find the type of consolidation that fits your financial situation and accomplishes your primary goal. Look at each available option and weigh your choices, finding the best fit.
How do I qualify for debt relief?
You generally qualify for debt relief after determining that other options are not available, such as a consolidation loan or paying off your debts strategically through a snowball debt paydown. If you need help, don’t be afraid to seek it. Debt relief programs are not judging you based on your credit score. They will want to know if you are in a financial hardship
What interest rates should I expect to pay on a debt consolidation loan?
Debt consolidation loans can have rates as low as 3.99% APR and up to 35.99% APR. The higher the interest rate the less likely that you have debt with an even higher rate that would make sense to consolidate. To get the lowest rates in the marketplaces, you need excellent credit.
What is APR?
APR is the yearly rate that lenders charge you to borrow money. APRs include the base interest rate of your loan plus all the fees that a lender charges you.
What are the risks of debt consolidation?
The purpose of a debt consolidation loan is to pay off existing debt. There is a risk you might run up new debt on top of the loan that consolidated your old debt, leaving yourself in a bigger hole. There is also the risk that you might not use the new loan to pay off old debt, using the funds for some other purpose other than to consolidate debt. You can avoid that from happening if you work with a lender that pays your debts off directly to stay in sight of your goals.
Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q2 2022 was $16.15 trillion. Auto loan debt was $1.50 trillion and credit card was $0.89 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1.739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Each state has its rate of delinquency and share of debts in collections. For example, in New Jersey credit card delinquency rate was 3%, and the median credit card debt was $430.
To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.