According to the Federal Reserve Bank of New York, Americans owed $820 billion in credit cards debt by 2020. While total debt obligations were lower than in previous years, consumers still accounted to 5.4% of American households’ disposable income.
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A debt consolidation loan may be an option if you have high-interest debt such as credit cards, personal loans and medical loans. Consolidating debt can help you save interest, pay off debts quicker, and streamline your finances by paying one monthly installment.
A debt consolidation loan is only worth considering if the interest rate you are paying on your current debts is lower. Also, you should consider any fees. Compare rates from multiple lenders and then compare the results to determine if consolidation loans are right for you.
Here are our top picks for the best consolidation loans for debt?
All information regarding loan rates and interest rates is correct as of May 4, 2022. This information is updated regularly by NextAdvisor’s editorial team. However, it is possible that APRs or other information have changed since the last update. AutoPay may be used to get a rate discount from some lenders. It will be obvious if the advertised rates include an AutoPay Discount. Some loan offers may not be available in your area. Remember that only borrowers with excellent credit may be eligible for the longest loan terms or the largest loan amounts.
What is Debt Consolidation?
Consolidating debt is the process of consolidating multiple sources of debt, such as credit cards, personal loans and payday loans, into one loan. Consolidating debt is common for the following reasons:
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- You can simplify your finances by consolidating your debt into one monthly payment
- Consolidating high-interest debt, like credit card debt, into a lower-interest loan
- Consolidating debt at a variable rate to a fixed-rate loan
- Reduce your monthly payments by taking out a longer term loan
- Budgeting easier with monthly fixed payments
Balance transfer credit cards or debt consolidation loans are the most popular ways to consolidate debt. A debt consolidation loan is a loan that you use to consolidate your debt. The loan can be used to pay off existing debts and then repay the loan within a set time frame. If you are eligible for one of these cards, a balance transfer credit card offers a 0% introductory APR. It doesn’t matter if you are using a credit card balance transfer or a consolidation loan to consolidate debt, it is important to have a plan in place to repay the debt before the loan term expires or the introductory APR expires.
What is a Debt Consolidation loan?
A debt consolidation loan can be a personal loan that is taken out to consolidate debt. While many lenders offer debt consolidation loans, the terms and interest rates are the same as personal loans. Some debt consolidation loans may offer benefits for those who want to consolidate debt. For example, you can pay your lenders directly through the loan provider and save a step.
Benefits of a Consolidation Loan
If used properly, a debt consolidation loan can be used to pay off debt and improve financial health. A debt consolidation loan has the following benefits:
Lower APR. You may be able consolidate high-interest debt such as credit card debt to get a loan with lower APR. You may be able pay your debt off faster if you have a lower APR. The exact rate will depend on your credit score and your debt-to-income ratio. To find out your rate, you’ll need prequalification for a loan. If your current APR is higher than the rate you are currently paying, a debt consolidation loan may not be a good option. Be aware of the fees that may impact your savings. Before you take out a consolidation loan for debt, make sure to crunch the numbers to determine how much you can save.
Remember that a consolidation loan for debt will not help you if there is a plan to repay the debt. Before taking out a debt consolidation loan:
- To make sure that you are saving money, calculate the interest and fees
- Incorporate the loan payments in your budget
- To ensure that you don’t miss any payments, keep track of the payment deadlines.
- Debt Consolidation Loan or Balance Transfer Credit Card
A balance transfer credit card is an alternative to debt consolidation loans. A balance transfer credit card offers a credit limit of 0% with an introductory period that typically lasts between 6 and 20 months. A balance transfer credit card can be used to consolidate your debt. You simply put your existing debts on the card and pay it off before the introductory period ends. There is no interest.
You may be required to pay a balance transfer fee of around 3%.
- Alternatives to a Consolidation Loan
There are many other options than balance transfer credit cards. Personal loans and debt consolidation loans can also be available. These are:
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- HELOC or Home Equity Loan
With a home equity loan (HELOC) or a home equity line credit (HELOC), you can access your home equity to get immediate cash. A home equity loan, a secured installment loan, is where you borrow a lump amount and then pay it back with interest over a set period. HELOCs are revolving credit lines that work like credit cards. You can withdraw as much money as you want during the draw period, and then repay it during the repayment period. HELOCs and home equity loans use your home equity to secure the loan and can have lower interest rates than personal loans or credit cards. The lender may foreclose your home if you default on the loan.
- Cash-Out Refinance
A cash-out refinance is similar to a HELOC or home equity loan. You can also use your house as a way to access cash. It works in a different way. A cash-out refinance allows you to take out a new mortgage that is higher than your existing mortgage. The money will be used to pay off your old mortgage and give you the cash. A cash-out refinance is a better option than a personal loan, home equity loan or HELOC because mortgage rates are currently low.
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- Credit Counseling
Many credit counseling agencies can help you create a debt repayment plan to get your finances on track. Credit counseling is not the same as debt settlement. In this instance, for-profit companies work with creditors to try to settle your debts for less than the full amount owed. Most debt settlement companies charge high fees and can damage your credit score by settling your debt for less money than you owe. Nonprofit organizations often offer credit counseling for a nominal fee or free of charge.
