Debt consolidation combines several debts into one loan or account. It can be a great option if you have multiple high-interest debts, since you may qualify for a lower interest rate.
While debt consolidation doesn’t eliminate your debt, it can make it easier to repay.&nb🅘sp;
- A closer look at debt consolidation
- 3 ways to consolidate debt
- Benefits of debt consolidation
- Drawbacks of debt consolidation
- Is debt consolidation right for me?
- Frequently asked questions
A closer look at debt consolidation
Debt consolidation allows you to get a new loan or credit cardܫ to pay off other debts. After consolidating, you would have just one monthly payment with a single interest rate, so you wouldn’t have to juggဣle multiple due dates.
A debt consolidation loan can also save you money if you can lock in a lower interest rate. If you opt for a longer repayment term, you’ll have lower monthly payments but will pay more in interest over the life of the loa꧒n. Either way, debt consolidation loans come with a set repayment term, so you know exactly when you’ll pay off your debt.
3 ways to consolidate debt
There are a few ways to consolidate your debt, depending on yo🗹ur situation. Here are some of the most popular options:
1. Balance transfer card
This type of credit card allows you to move your existing card balances to a new card. Many of these cards offer an introductory 0% APR (annual percentage rate) for as long as 21 months. You can use this promotional period to pay off your debt without any interest.
Keep in mind that once the introductory period is over, you’ll be charged a standard APR by the card issuer, which could be higher than what yo꧑u were paying on your other cards.
2. Debt consolidation loan
This is a type of personal loan that you can get from online lenders, banks, and credit unions. With a debt consolidation loan, you combine your debts into one loan and monthly payment. 🍰You may be able to qualify for a lower APR than what you’re paying on your other debts, but you’ll l♑ikely need good to excellent credit.
Also, be mindful that debt consolidation loans may extend your repayment term 💃in order to lower your monthly payment. This means you’ll pay less each month but pay more in overall interest.
3. Home equity loan
If you have equity in your home, you can consider borrowing against t🐼he equity in your home to consolidate d♛ebt.
The benefit of this option is that home equity loans tend to have lower interest rates. T𓃲he downside is that this type of loan uses your home as collateral — so if you fail to pay it back, you could lose your home.
Pros of debt consolidation
- Simplifies debt repayment: Instead of keeping up with multiple payments that have different due dates, you only have to make one monthly payment.
- Could reduce your interest rate: You can also receive a temporary 0% APR with a balance transfer card. This will lower the amount you pay in interest over time and could speed up your debt repayment.
- Set payoff date: With a debt consolidation loan, you have a fixed repayment term, so you know exactly when you’ll be done paying it back.
Cons of debt consolidation
- Could extend your repayment term: This means that you’ll spend more time paying down your debt, which could increase the cost of borrowing, since you’ll pay more in interest over a longer term.
- May have upfront costs: For instance, a debt consolidation loan’s origination fee — which can either be a flat fee or 1% to 15% of your loan amount — gets subtracted from your loan amount, so you’ll actually receive less than the amount you applied to borrow. A balance transfer credit card may require a balance transfer fee. This fee is usually a percentage of the balance you’re transferring or a fixed amount determined by the card issuer. Either way, a high fee may mean that a loan or balance transfer card isn’t worth it.
- Added risk with a home equity loan: A home equity loan puts your entire home at risk if you’re unable to repay the loan. While this loan option has some benefits, you may want to avoid it for debt consolidation if you’re struggling to make debt payments or don’t have enough debt to justify putting your home up for collateral.
Is debt consolidation right for me?
Debt consolidation may be a good idea if you’re looking to simplify debt repayment. If you’🌌re currently juggling multiple monthly payments or even missing payments, debt consolidation could offer some relief.
Th💖is may also be a good option if you’re looking to lower your APR with a debt consolidation loan or balance transfer credit card. If your goal is to pay off your debt faster, temporarily getting rid of interest or lo🐻wering your rate could help.
Debt consolidation isn’t a good option, however, if it won’t really save you any money or simplify your debt situation — or if it merely keeps you in a debt cycle trap. Consider prequalifying with different debt consolidation lenders to find out if you could potentially save money — prequalifying online is simple and won’t affect your credit.
Debt consolidation frequently asked questions
Before you make a decisi♚on on debt consolidation, check out the answers to some commonly asked questions.
How much debt can I consolidate?
The maximum amount of debt you can consolidate varies by lender and their loan amounts (or by card issuer, if you opt for a balance transfer card). Remember, banks, credit unions, and online lenders offer debt consolidation loans, and each se🐽ts its ownও loan limits and other eligibility requirements.
It’s best to compare a few lenders online once you know how much debt you’re looking to consolidate. With Credible’s partner lenders, you may be able to borrow as much as $100,000.
Does debt consolidation hurt my credit?
A debt consolidation loan may temporarily hurt your credit when you apply for it, since the lender will check your credit. This is kno꧋wn as a hard inquiry. Applying for multiple debt consolidation loans at different times can negatively impact your score, since they may count as separate hard inquiries. But hard credit checks usually only affect your credit for one year.
Additionally, a new debt👍 consolidation could lower the average age of your credit accounts, which could also negatively impact your score. Your credit history length accounts for 15% of your FICO credit score.
On the plus side, making your payments for a debt consolidation loan on time and in full each month can actually i🔯mprove your credit.❀
How can I qualify for debt consolidation?
Debt consolidation loan eligibility requirements vary by lender, but many have minimum credit score and income requirements. You’ll have a better chance of qualifying (and for lower rates) if you have a good to excellent credit score (670 or above), but there are also personal loans for fair credit. You might also consider adding a creditworthy cosigner to your loan application if it helps you gain appro♈val or secure a better APR.