Consolidating debt involves borrowing money to pay off several previous loans. You’ll only have one bill to pay after consolidation—ideally at a lower interest rate.
Although this approach might be a great way to simplify your spending and save money, not everyone will find it to be sensible. This is all the information you need to determine if debt consolidation is the right choice for you.
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It can be simple to accumulate debt, particularly if you have a tendency to overspend or are forced to use a credit card to pay for necessities. However, when interest rates are sky-high and monthly payments are so high that you have no extra money to throw at them, it’s usually much harder to get out of debt.
If you find yourself in a situation where you feel like you can never get out of debt and you are unable to pay off all of your bills, a personal loan for debt consolidation could be a helpful tool to help you start moving forward with your financial situation.
How debt consolidation works
Applying for a debt consolidation loan entails submitting an application for a certain sum of money, typically sufficient to cover the precise amount of total debt you’re attempting to pay off. Lenders usually pay your creditors directly after they are approved, requesting their details and the amount you want to send to each. Alternatively, the money could be transferred straight into your bank account and used to settle your debts; after that, all you would have to do is make fixed, equal monthly payments to repay the debt consolidation loan within the allotted time frame.
You will pay interest on any loan, just like any other, but unlike credit card interest, which typically averages 16 44% based on the Feds’ most recent data, 20% E2%80%94%, and the current average annual percentage rate (APR) for a personal loan is approximately 209. 09%. The majority of loan terms range from six months to seven years. Usually, your interest payments are factored into your monthly payment and spread out over the loan’s life. Choose the shortest-term loan you can afford because the longer the term, the lower your monthly payment will be, but you’ll pay more interest over time.
Depending on your credit score, a number of no-fee options with different interest rates are available, but some lenders also charge an origination or sign-up fee. When choosing a personal loan, try to avoid paying excessive fees, and always make sure you are comfortable with the terms and features before accepting the loan.
As an alternative, you could think about selecting a credit card with a 200 percent annual percentage rate balance transfer to consolidate the debts you currently owe on several credit cards. Let’s imagine, however, that you apply for a credit card such as the Citi Simplicity® Card or the U S. The %20Bank%20Visa%C2%AE%20Platinum%20Card: You can use an introductory 20% interest offer to pay off as much as possible while transferring the balance of your current credit cards to the new card. The Citi Simple Card’s 200 percent intro APR is in effect for 2021% of the months following the date of the first transfer (after 2019). 24% – 29. 99% of the time, the transfers must be finished within the first four months, and the Visa Platinum Card’s interest-free period lasts for the first few 2018 billing cycles (after, 2018). 74% – 29. 74% variable).
Just bear in mind that, depending on the credit card you select, you will have to pay a balance transfer fee. However, since there won’t be any interest compounding, paying the balance transfer fee can be worthwhile if you have a large amount of debt.
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Rewards
None
-
Welcome bonus
None
-
Annual fee
$0
- Introduction APR 0% Intro APR for 2021 months on balance transfers from the date of the first transfer and 200 percent Intro APR for 2012 months on purchases from the account opening date
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Regular APR
19.24% – 29.99% variable
- Balance transfer fee: An introduction of the balance transfer fee is available. It is 3% of each transfer (minimum $5) that must be finished within the first 4 months of the account opening.
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Foreign transaction fee
3%
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Credit needed
Excellent/Good
- Terms apply.
-
Rewards
None
-
Welcome bonus
None
-
Annual fee
$0
- Introductory APR0% for the initial 2021–2022 billing cycles on balance transfers and purchases
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Regular APR
18.74% – 29.74% (Variable)
- Balance transfer fee: $3 percent of each transfer’s amount or $5 percent of the minimum, whichever is higher
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Foreign transaction fee
3%
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Credit needed
Excellent/Good
You might receive a lower interest rate
The chance to get a lower interest rate is a big incentive to consolidate your debt; over time, this could save you hundreds or even thousands of dollars.
Bankrates website has an online interest calculator you can use to figure out how much youd have to pay in interest over the life of a loan — or until you pay off your debt. For instance, lets say you have a total debt balance of $25,000 with a combined interest rate of 7.5%. In this case, you can expect to pay $6,799.84 in total interest over the life of the loan. Now, lets say youve consolidated those debts and are currently paying an interest rate of 6%. In this case, youd only have to pay $5,050.46 in interest over the life of the loan, meaning youd be saving $1,749.38 in interest payments.
Remember that even though the new interest rate you get might not always be significantly less than your current rate, any savings is still preferable to none at all.
A balance transfer credit card with a variable annual percentage rate (APR) can provide you with the flexibility to make monthly payments without accruing interest for a limited period of time. k. a. , the introductory period). With the Citi Double Cash Card, you can transfer your balance and make monthly payments at an introductory rate of 200 percent annual percentage rate for the first nine months of 2018 (19). 24% – 29. 24% APR variable thereafter).
- Earn 2% reward points on every purchase you make with an infinite 1% cash back when you buy, plus an extra 1% reward point as you pay for those purchases. To receive cash back, make on-time, minimum payments. Additionally, for a limited period of time, earn 5% of the total cash back on hotels, car rentals, and attractions that you book through the Citi Travel Portal through March 31, 2012.
- Welcome bonus: Spend $1,500 on purchases within the first six months of opening your account to earn $200 in cash back. The 20,000 ThankYou® Points that come with this bonus offer can be exchanged for $200 in cash back.
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Annual fee
$0
- Intro APR0% for the first few months of 2018 on balance transfers; N/A for purchases
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Regular APR
19.24% – 29.24% variable
- Balance transfer fee: For balance transfers completed within 4 months of account opening, an introduction balance transfer fee of 3 percent of each transfer ($5% minimum) applies; thereafter, a balance transfer fee of 5 percent of each transfer ($5% minimum) applies
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Foreign transaction fee
3%
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Credit needed
Fair/Good/Excellent
- See rates and fees. Terms apply.
However, the Citi C2%AE Diamond Preferred C2%AE Card offers an introductory interest-free period for 2021 months for balance transfers from the date of the first transfer (see rates and fees) if you need a credit card with a longer 20% intro APR period. After that, the variable APR will be 18. 24% – 28. The percentage is 99% variable; the balance transfer fee is either 5% of the total amount of the transfer or 5% of the amount of the transfer, whichever is higher. After opening an account, balance transfers for both cards must be finished within four months.
You might feel like you’re able to repay your debt faster
Being able to pay off your debt a little bit faster is another benefit of having a lower interest rate. While having a lower interest rate may actually allow you to put some extra cash toward the principal, high interest rates frequently give borrowers the impression that the majority of their monthly payment goes toward the interest rather than the principal. Your ability to contribute an additional $50 to your monthly payments can have a positive impact on how long it takes you to pay off the debt in full.
If you want to use debt consolidation to achieve this, apply for a personal loan without prepayment penalties or additional costs if you pay off your loan earlier than you were meant to. Prepayment penalties can show up as a percentage of your loan balance, as the interest your lender is losing out on because you paid it off early, or as an additional fixed fee. The exact cost of a prepayment penalty varies depending on how it is assessed.
Check the loan terms to see if there is a prepayment penalty. Certain lenders, such as LightStream and Discover Personal Loans, allow borrowers to apply for up to $100,000 and $35,000, respectively, without imposing prepayment penalties. Happy Money is a lender that provides $5,000 to $40,000 personal loans with no prepayment penalties. Happy Money’s loans are only intended for debt consolidation.
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Annual Percentage Rate (APR)
7.49% – 25.49%* APR with AutoPay
- Loan purpose: home improvement, vehicle financing, debt consolidation, medical costs, and other
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Loan amounts
$5,000 to $100,000
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Terms
24 to 144 months* dependent on loan purpose
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Credit needed
Good
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Origination fee
None
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Early payoff penalty
None
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Late fee
None
Terms apply. *AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0. 50% points higher. Excellent credit required for lowest rate. Rates vary by loan purpose.
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Annual Percentage Rate (APR)
7.99% to 24.99%
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Loan purpose
Debt consolidation, home improvement, wedding or vacation
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Loan amounts
$2,500 to $40,000
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Terms
36, 48, 60, 72 and 84 months
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Credit needed
Good
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Origination fee
None
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Early payoff penalty
None
-
Late fee
$39
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Annual Percentage Rate (APR)
11.72% – 17.99%
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Loan purpose
Debt consolidation/refinancing
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Loan amounts
$5,000 to $40,000
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Terms
2 to 5 years
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Credit needed
Fair/average, good
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Origination fee
0% to 5% (based on credit score and application)
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Early payoff penalty
None
- Late fee of 5% of monthly payment amount or $15, whichever is higher (with 2015-day grace period)
Your monthly payments will be simplified
Consolidating your debt can not only help you save money but also improve your sense of financial organization. The lender will send the money to your creditors to settle the balances when you apply for a debt consolidation loan, so the only monthly payment you will have to make is for the loan itself.
The stress of having to remember to make multiple payments each month before their due dates can be lessened by only having one monthly payment rather than several. This is especially true if you don’t have Autopay set up. Keep in mind that your credit score may suffer if the lender reports to the credit bureaus that you miss a payment or pay it late.
Certain personal loan providers aim to simplify your monthly installments by providing a discounted interest rate solely for signing up for Autopay. A few lenders that provide a 0 percent loan are SoFi and LightStream Personal Loans. 25% to 0. 50% interest rate discount for making your monthly payments automatically.
- Annual Percentage Rate (APR)8. 99% to 25. 81% when you sign up for autopay.
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Loan purpose
Debt consolidation/refinancing, home improvement, relocation assistance or medical expenses
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Loan amounts
$5,000 to $100,000
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Terms
24 to 84 months
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Credit needed
Good to excellent
-
Origination fee
No fees required
-
Early payoff penalty
None
-
Late fee
None
-
Annual Percentage Rate (APR)
7.49% – 25.49%* APR with AutoPay
- Loan purpose: home improvement, vehicle financing, debt consolidation, medical costs, and other
-
Loan amounts
$5,000 to $100,000
-
Terms
24 to 144 months* dependent on loan purpose
-
Credit needed
Good
-
Origination fee
None
-
Early payoff penalty
None
-
Late fee
None
Terms apply. *AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0. 50% points higher. Excellent credit required for lowest rate. Rates vary by loan purpose.
You may not get approved for a lower interest rate
Your credit score and credit report will determine the interest rate you pay for any new loans or credit lines. In general, you can get lower interest rates if your credit score is higher, and higher interest rates if it is lower. Additionally, if you’ve recently applied for other credit lines, it’s a good idea to hold off on applying for a new loan because too many hard inquiries on your credit report can lower your credit score and result in higher interest rates. Although you will be approved for the loan, you will probably pay a higher interest rate if your credit score is on the lower side. Personal loan and debt consolidation lenders do accept applicants with less than ideal credit scores.
When you are able to obtain an interest rate that is less than the rates you are currently paying for your current debts, debt consolidation works best. In order to ensure you are comfortable with the terms before signing on the dotted line, many lenders let you check the rate you would be approved for without affecting your credit score.
The debt snowball method, which involves making larger payments toward the debt with the lowest balance while making the minimum payments on all other debts, may be something you want to take into consideration if you are uncomfortable with the interest rate you will be paying on your debt consolidation loan. After paying off that debt, you can proceed to the next lowest amount and keep going until you have no debt left. By using this method, you can pay off one debt more quickly, which can boost your confidence and inspire you to continue paying off the remaining ones.
You can face additional damage from late payments
Missed or late payments can lower your credit score, just like they can with any kind of credit or loan. Recall that applying for a new loan or credit line results in the opening of a hard inquiry on your credit report, which will temporarily lower your credit score.
Moreover, missing or making late payments can further reduce your credit score. In addition, a lot of lenders will impose additional costs for late or missed payments, which can make the debt consolidation process feel even more expensive.
Make sure your debt consolidation loan is set up for autopay to prevent any missed or late payments. In this manner, you won’t have to worry about forgetting to make your monthly payments because they will be automatically taken out of your bank account before the due date.
Debt consolidation won’t keep you out of debt
Finally, even though you could be able to pay off your debt more quickly by consolidating it, the loan by itself won’t keep you out of debt. Many borrowers wrongly assume that debt consolidation is ineffective for them because, soon after they were debt-free, they reverted to their previous spending patterns and ultimately accrued additional debt.
Consolidating debt is just one more tool for reducing numerous high-interest monthly payments. Determining the root cause of your debt accumulation is crucial. Financial expert and author Paco de Leon claims that many people have underlying issues that lead to credit card debt that they are unable to pay off, such as overspending when they are stressed. If you’re having problems paying off debt, talking to a financial counselor or advisor can be very beneficial.
FAQ
What is a consolidation loan and how does it work?
The process of taking out a single loan or credit card to pay off several debts is known as debt consolidation. Reducing interest rates and monthly payments are two advantages of debt consolidation. A personal loan, home equity loan, or balance-transfer credit card can all be used to consolidate debt.
Does consolidating loans hurt credit score?
While debt consolidation can result in lower monthly payments, it may also temporarily lower your credit score.
Is it worth it to consolidate my loans?
If you have high-interest debt, possibly from credit cards, it could be beneficial to consolidate your debt. You can consolidate debts into a single account with a single monthly payment by using consolidation. It’s possible that you can streamline the debt repayment process, which will help your financial situation.
Read More :
https://www.cnbc.com/select/debt-consolidation-pros-cons/
https://www.usbank.com/loans-credit-lines/debt-consolidation.html