Personal Debt Consolidation Loans for Good and Bad Credit
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Debt consolidation loans are when a lender can issue a single personal loan so you can pay your other debts. It basically “combines” it in the sense that you’ll pay a fixed installment monthly to your lender for a set period, usually two to five years. This way, you can pay off things like balances on your high-interest credit cards in a much easier way. In addition, the interest rate usually doesn’t change during your loan period, and will depend on your credit profile.
Things to Keep in Mind
Debt consolidation makes life easier, and is a good strategy if you:
Find it difficult to keep up and pay multiple small amounts
Can avoid adding to the debt you already have while paying off what you currently owe
Can find a loan that has a cheaper interest rate than the debts you want to consolidate
There are different ways to consolidate your loans
Home equity loans
Student loan consolidation
Should you decide to take out a debt consolidation loan, make sure to look and analyze the following:
Any fees your lender will charge
The kind of support your lender offers, like
having the option to pay creditors directly
If you can get a lower interest rate when you have a co-signer
Consolidating Debt: Loan vs. Credit Card
People with good credit can apply for a 0% interest credit card. If you’re in good standing, you can do this and transfer your existing balances to it. This method, called “balance transfer,” saves you money.
However, this means you need a lot of discipline to pay it off before their promotional rate expires, and it’s usually only up to 21 months. In addition, the amount of credit card debt you can transfer is usually only up to $15,000. Once this promo period expires, often the rate you’ll see on a balance transfer credit card is much higher than on a personal loan. As such, you have to avoid making further debts and charges during this period.
Now, a personal loan has its own set of advantages. Fixed payments mean you’ll pay off debt within a scheduled amount of time. Limits to borrow are also typically higher, with some lenders offering $50,000 or more.
A personal loan can also improve your credit if you have high card balances in comparison to your credit limits. Credit scores get hurt when you use most or all the available credit you have on your cards.
Conversely, a personal loan balance is treated differently – it’s reported as installment debt while credit cards are reported as revolving debt.
Banks, credit unions, and online lenders offer personal loans, but it’s recommended you visit your local credit union first. This is because they offer flexible loan terms and lower interest rates compared to online lenders, and this is especially true if you have a low credit score. A federal credit union is allowed a maximum annual percentage rate of 18%.
Should you decide to use an online lender, you can get personal loans from reputable ones which usually have annual percentage rates (APRs) ranging from 5 to 36 percent. As such, the better your credit the better rate you get. If you have poor credit score or a limited credit history, then your pay rates will be on the higher end of that spectrum. In addition, all lenders have their own set of approval guidelines.
Estimated Loan Terms for $10,000 payable in 36 months
Comparing Debt Consolidation Lenders
When choosing a lender, the APR is the biggest factor you need to consider, as it determines whether your loan will work for you or not.
In addition, ask these questions as well to see if the loan you’re planning to take will make financial sense in your situation:
Will the lender help me pay my own debt
Companies like Discover and FreedomPlus allow borrowers with good credit to pay creditors directly, which can increase your chances of successfully paying off debt. However, not all online lenders allow this. A credit card consolidation lender called Payoff gives advice based on your personality, even offering a few periodic checks so you stay on track towards paying off your debts.
What fees will the lender charge
Most online lenders will charge you an upfront fee called an origination fee, and it usually goes from 1 to 6 percent of the loan amount you’re asking for. Some lenders will deduct that fee upfront so you won’t get the exact loan amount you asked for. As such, check with the lender about this before accepting the loan. The companies Discover, SoFi, and LightStream do not charge an origination fee, and Marcus does not charge any fees whatsoever.
Can I add a co-signer to my loan
A co-signer can get you a better rate, but not all lenders allow it. Companies like LightStream, FreedomPlus, and Lending Club allow co-signers, with FreedomPlus giving a discounted rate for paying creditors directly or for adding a co-signner. Those with lower credit scores may qualify for a loan from Mariner Finance or OneMain Financial, lenders that allow you to add a co-signer with good credit. Just remember that your co-signer is tied to this for the entire loan amount if you fail to make your payments.
How to Consolidate Debt
Getting a personal loan to consolidate debt is only a good idea if you either get an interest rate that’s lower than your existing debt or if it helps you pay off your debts more quickly.
To effectively use the personal loan, you’ll need a strategy on hand so you can tackle the debt. This includes not using any of the credit cards you’re still trying to pay off. Otherwise, you’re just basically postponing the inevitable.
One great tip is to have a small emergency fund before you take on your debt, so you’re not forced to use any of your cards should something unexpected happen and you need funds while you’re trying to clean up your act.
Finding Out Which Debt Consolidation Is Right for You
As previously mentioned, there are different ways to consolidate loans. Here are their types and their pros & cons:
- Low interest rates, at an average of 2.5 percent average introductory rate for balance transfer cards
- You have only one account to track
- Quick application and approval
- Low upfront fees
- You need great credit scores or you might not qualify for the advertised introductory rate
- Balance transfer usually involves a fee
- Your interest rate may become extremely high if you become 60 days late in payment; the rate might even be higher than the rates of the balances you’re trying to pay off
- The introductory rate is good only for a limited time, then increases after that set period
- Cash-out refinancing means the loan is secured by your home, so the interest rate is significantly lower compared to other debt such as credit card balances
- The interest may be tax deductible; to be sure, check with a tax professional
- Home mortgages have longer terms, so you can stretch out your credit card debt up to 30 years, lowering your monthly payment
- You can get a better rate compared to your old mortgage
- You could lose your home if you can’t make the payment
- If your credit card debt is secured by a home, you can no longer discharge it via bankruptcy or Chapter 7 filing
- The cash-out refinancing process takes time
- It has higher upfront costs compared to every other strategy
- While stretching your repayment means you have more time to pay it all back, it can increase your total interest expense regardless if the interest rate is lower
Home Equity Loans
- Lower interest rates because your loan is secured by your property
- Tax-deductible interest rates
- Easier debt management – a single fixed rate loan replaces multiple variable rates
- Home equity loans have much lower costs than cash-out refinances and can be processed much more quickly.
- Extending your debt repayment over more time can lower your monthly payments
- If you don’t pay up, you might lose your home and have it foreclosed
- If you have bad or shaky finances, a mortgage (or home equity debt) is probably not your best bet, as debt moved from unsecured accounts into a mortgage, it can no longer be discharged in bankruptcy
- Paying off your debt over a longer time frame might increase your total interest cost even if the rate is lower; avoid this by accelerating your repayment with extra principal payments
- Most personal loans have fixed interest rates
- Application, processing, and approval usually get done in a day
- Fees are much lower compared to those in home equity loans or cash-out refinances
- Terms range from one to five years; you become debt-free much more quickly
- Personal loans can be discharged in a bankruptcy
- Personal loans are unsecured loans, meaning interest rates are much higher compared to home equity loans or cash-out refinancing
- Payments are higher because terms are shorter
- You need a good credit score or you may not get a lower rate than what you’re already currently paying on your credit cards
Student Loan Consolidation
- You can lock in a lower interest rate
- You have only one student loan payment each month
- You pay less overall interest, with a lower rate and lower term
- You get more flexible terms – as such you can extend terms in exchange for a smaller monthly payment
- When you consolidate a student loan, you may no longer qualify for federal loan forgiveness programs
- The flexible terms may mean while you have more time to pay off in smaller amounts, the total amount in the end is higher than your original intended amount
- Those with poor credit may get a worse interest rate than what they have
- Going from a fixed to a variable rate also could mean you pay more overall if interest rates suddenly go up