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Debt consolidation could be a great way to get out of debt and improve your financial picture, but it is not right for everyone. This guide will help you understand which types of debt can benefit most from debt consolidation and which solution might be right for you. You'll also learn how debt consolidation can impact your credit score.
Debt consolidation is the process of combining several debts into one new loan. It can be difficult to manage debt payments, especially if you have multiple high-interest debts, so the goal of debt consolidation is to streamline debt and thereby reduce monthly payments. Plus, you could pay less in interest and pay off your debt more quickly once you consolidate.
You can consolidate several different types of debt, including credit cards, auto debt, medical debt, personal loan debt and student debt. Combining different types of debt into one loan makes it easier to keep up with monthly payments, and it can save you thousands in interest. If you want to consolidate your debt, there are four major debt consolidation methods to consider.
There are a variety of ways to consolidate debt and the right method for you depends on your unique financial situation. It is important to understand and compare your options before making a decision.
A balance transfer credit card allows you to transfer your existing debt balances with an introductory 0 percent APR.
Introductory APR: 0%
Easier to get than securing other loans
Best for smaller debts to be paid early
A home equity loan is a secured, variable rate loan that allows you to borrow against your home’s equity, typically with lower rates.
Average APR: 3-12%
Best for homeowners with equity
Higher loan amounts are available
A personal loan is typically unsecured and comes with a fixed interest rate that will not change over the life of the loan.
Average APR: 5-35%
Possible direct payments to creditors
Best for borrowers with good credit
A debt relief company or nonprofit agency will negotiate with creditors on your behalf and come up with a plan to pay off the debts.
Average fee: 15-25%
Low cost alternative to bankruptcy
Best for those who are deep in debt
To figure out if debt consolidation is right for you, add up your outstanding loan amounts, credit card balances and other debts. The calculator below will help you determine how debt consolidation would impact your overall monthly payment, and how much you would save on interest.
Before deciding on a lender, make sure that consolidating your debt is the right decision for your situation. Here are some of the key perks and downsides to be aware of before signing on the dotted line.
Consolidating your debt can help you qualify for a lower interest rate
Combining multiple payments into one makes it easier to make monthly payments on time
Making on-time debt consolidation loan payments can help you boost your credit score
There are often upfront costs such as loan origination fees, balance transfer fees, closing costs and annual fees
You might not qualify for a lower interest rate
If you miss payments or make them late, you could end up spending more money overall
Credit cards are easier to qualify for than other credit products, but they typically come with higher interest rates. If you are looking to consolidate credit card debt, it is important to find a product with a lower interest rate than the one you’re currently paying.
Personal and home equity loans generally have lower interest rates than credit cards. If you choose to refinance with a 0 percent balance credit card, make sure you know how long the interest rate will stay 0 percent and what rate you will qualify for once the introductory rate ends.
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There are a variety of ways to consolidate debt and the right method for you depends on your unique financial situation. It is important to understand and compare your options before making a decision.