Are debt consolidation loans a good idea?
A debt consolidation loan is a viable option for a consumer with a low debt-to-income ratio, high credit score, and sufficient income. You should use a debt consolidation loan to consolidate other debts if it helps you reduce interest rates, monthly payments, or the time it takes to become debt-free.
Deb consolidation can be an excellent option if a bank or lender is willing to give you a loan with a low-interest rate. What is considered a low-interest rate? That depends on your current financial situation. Your goal should always be to save money. So, if your existing rate is 20% and you can qualify for a loan with a 15% interest rate, that’s a low-interest rate for your situation. You need to understand what you’re currently paying and can then work to save money and reduce your interest.
Notice the words – “can be an excellent option” – because there are other factors that you must consider when deciding if a consolidation loan is worth it. However, credit scores can be negatively affected by applying for a loan due to credit inquiries. However, one way to compare personal loans and debt consolidation loan rates for free without negatively affecting your credit is through Credible Loans – a Free Loan MarketPlace.
If you can’t qualify for a low interest loan due to bad credit, debt settlement programs can be your best path to saving money. However, going this path could hurt your credit score even more so, making it more difficult to rebuild your credit score over the long term. On a positive note, you could end up saving the most money when using a reputable debt settlement program.
So, is debt consolidation worth it?
Whether a debt consolidation loan is worth it depends on your financial situation – credit score, credit utilization ratio, debt-to-income ratio – and goals. Here are some factors to consider:
- Interest rates: One of the main benefits of a debt consolidation loan is that it can lower your interest rate, especially if you have high-interest credit card debt. If you can get a lower interest rate on your consolidation loan than you currently pay on your existing debts, you could save on interest over time.
- Monthly payments: Consolidating your debts can also simplify your monthly payments by combining multiple debts into one loan with a single monthly payment. This can make it easier to keep track of your finances and avoid missed or late payments, which can negatively impact your credit score.
- Repayment timeline: Depending on the terms of your consolidation loan, you can extend your repayment timeline, which can lower your monthly payments. However, this could also mean that you’ll pay more in interest over the life of the loan.
- Fees: Some lenders may charge fees for originating or servicing a consolidation loan, so it’s essential to carefully read the terms and conditions and factor in any fees when comparing loan options.
Consider Bad Debt vs. Good Debt
You can replace bad debt with good debt by simply consolidating debt with a loan that costs less than your existing debts, resulting in extra income and savings. The key is to figure out the cost of the loan and compare it to the cost of your current debt. If the loan will eliminate interest and fees, allowing you to save money and get out of debt faster, then it’s worth it.
What is bad debt? Accounts that cost you more in interest and fees than the income it generates is bad debt. Good debt is when the debt produces more income than the cost to service it. For example, if you purchase a rental property with expenses of $900 per month, including the mortgage payment, taxes, and all costs, and rent it out for $1,000, that’s $100 in positive cash flow every month from that investment. That’s good debt.
A low-interest consolidation loan, used to pay off high-interest debt, resulting in significant savings, debt reduction, and relief, is also considered good debt because it puts dollars in your pocket and can be used to build wealth.
But there should be no shortcuts when considering debt consolidation. Lenders all have different types of loans that carry interest, fees, and in some cases, a high APR. Get a good calculator or use a spreadsheet and add up the loan cost compared to your current payments. Remember to read your entire loan contract for all fees and expenses associated with the loan, and only shop around at reputable lenders.
Compare top-rated debt consolidation lenders –
- Americor reviews
- Avant’s Personal Loan reviews
- LendingTree Debt Consolidation Loans
- For veteran or military personal loans for debt consolidation, credit unions, including Navy Federal and USAA, are great places to consolidate your debt.
- OneMain Financial debt consolidation loans for bad credit
Disadvantages of Debt Consolidation Loans:
- Cost: Debt consolidation loans can come with loan origination fees, interest rates, and charges making them more expensive than the cost of your existing accounts.
- Extended repayment period: While a debt consolidation loan may lower your monthly payments, it can also extend the repayment period, costing you more over the long term.
- You could end up with more debt: Debt consolidation loans can help you pay off credit card balances freeing up available credit, which may tempt you to accrue more debt, ending up with more debt than you started with.
- Risk of losing collateral: Some debt consolidation loans, like at OneMain Financial, require collateral, such as a home or car. If you default on the loan, you could risk losing that collateral.
- Impact on credit score: Opening a new line of credit or taking out a loan can temporarily lower your credit score. Although, your credit scores should improve after making six to nine monthly payments towards the loan.
- They don’t fix the core of your financial problems: Debt consolidation loans may not address the underlying financial issues that led to the accumulation of debt in the first place. Without addressing these issues, individuals may continue to struggle with debt even after consolidating their debts.
Is Using a Home Equity Loan for Debt Consolidation a Good Idea?
If you own a home with sufficient equity, getting a home equity line of credit will be better than getting your typical “bank loan.” It is common; to get a home equity line of credit where your interest rate could be below 6%. Having good credit and owning a home is required to get a home equity line of credit. But the downside of using a home equity line of credit to consolidate unsecured loans is that you’re swapping an unsecured loan that doesn’t risk any of your assets for a secured loan that requires your assets as collateral. Is it worth the risk? How confident are you that you’ll fully pay the home equity line of credit?
If you cannot get a low-interest bank loan or home equity loan, what other debt consolidation options do you have?
If you want to become debt-free, consumer credit counseling, debt validation, or debt settlement may be a better option over debt consolidation.
Call 877-332-8007 – our team of Specialists can personalize a plan to fit your budget and help you to achieve your goals!
Debt Consolidation for Credit Cards
If you have too many credit card payments to manage, debt consolidation simplifies the billing paying process. This is because you will have only one monthly payment to manage.
What if you’re behind on credit card payments? Should you still consolidate with a loan?
In that case, a debt consolidation loan will not be wise because your credit score will have taken a hit, and you won’t qualify for a low-interest loan.
Debt Consolidation Loans to Improve Credit Scores
Once you get a debt consolidation loan and pay off all of your credit card balances, don’t close the cards out. Closing your credit card accounts – hurts your credit score. Instead, pay the debts off and keep your cards open. Use them once per month – make sure to pay the entire balance off when the bill arrives. By doing this, you will stay out of debt and increase your credit score.
Learn about all of the credit card relief programs currently available in the United States – BEFORE applying for a credit card consolidation loan.
What does it cost to consolidate debt?
- Avant debt consolidation loans offer an APR range of 9.95 – up to 35%. Take a look at Avant Reviews.
- OneMain Financial debt consolidation loans provide an APR range of 18.00- up to 35.99%. Check out OneMain Financial Reviews.
- LendingTree Personal Loans offer an APR range of 8.49% – 35.97%. See LendingTree debt consolidation loan reviews.