Finance

Does a debt consolidation loan make sense?

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For those struggling with high-interest debts, debt consolidation might be an
avenue you may be interested in taking. Whether it’s paying off credit card bills or
personal loans, debt consolidation allows you to combine all your unsecured debts
into one bill that is later paid off with a loan.

When it comes to consolidating debt, there are two courses of action that both center your debt payments into a monthly bill. To start with, you can look into getting a balance-transfer credit card with 0% interest. This allows you to transfer your debts onto a card that can save you hundreds to thousands of dollars of interest in the long run. Most balance-transfer cards that offer terms like this are looking for cardholders with a credit score of at least 690. Here are some of the perks of a few trusted balance-transfer credit cards that offer 0% interest, according to Nerdwallet.

  • Discover it® Balance Transfer
    ○ APR ranges from 14.24%–25.24%
    ○ 0% APR on purchases for 6 months and
    ○ Access FICO score for free

The other option for those seeking to consolidate their debt is getting a fixed-rate debt consolidation loan. This is specific type of personal loan that is used to combine several payments and accounts into a single account with one lender and payment. If you have good credit, you’re more likely to receive a lower interest rate on your loan. Here are a few debt consolidation loans which you can apply for with a credit score of at least 640.

  • Prosper
    ○ Estimated APR of 14%
    ○ Loans range from $2,000 to $40,000
    ○ Maximum debt-to-income ratio of 50%
    ○ No minimum gross income required
    ○ No personal-check processing fees
  • Best Egg
    ○ Estimated APR of 9.3%–14.5%
    ○ Loans range from $2,000 to $35,000
    ○ Good for fast cash, as most loans are funded within a day
    ○ Debt-to-income ratio not specified but typically less than 35%
    ○ Ideal for those with several years of credit history
  • Payoff
    ○ Estimated APR of 13.9%
    ○ Loans range from $5,000 to $35,000
    ○ Maximum debt-to-income ratio of 50%
    ○ Loans may only be used to pay off credit card debt
    ○ Good for borrowers who have an annual income of at least $40,000

The consumer lending company LendingTree links borrowers and lenders together so they can agree on arrangements for different types of loans. The lending exchange company doesn’t directly offer consumers loans, but rather, it organizes connections between lenders and borrowers while collecting fees for its service. The loans that LendingTree offers range from traditional lenders, such as banks, to small companies and individual investors. LendingTree is a great place to get started if you are interested in taking out a debt consolidation loan like the ones listed above.

Other ways to Consolidate Debt

Aside from these two methods, there are other ways you can approach paying off your debt. Another option for debt consolidation seekers is taking out a home equity loan. The positives to this option are that the loan typically offers lower interest rates compared to other loans and good credit isn’t particularly required. However, there is a risk of foreclosure on a home if the homeowner cannot meet payments. The other debt consolidation option is taking out a 401(k) loan. This type of loan typically has a lower interest rate than an unsecured loan and the loan isn’t counted on your credit report. But like a home equity loan, there are also risks involved. If the borrower fails to repay, there are heavy penalties and fees. 401(k) loans are typically scheduled to be paid off by five years, but if the borrower loses their job or quits, then the loan is due in 60 days.

Debt Consolidation Calculator

A personal debt consolidation calculator can help you figure out if your debt is worth being consolidated. Debts to consider consolidating include credit card debt, personal loans, medical debt, and auto debt. To begin, you first enter your data (credit card or other loan installment balances) in the space provided. Then, you can adjust the consolidated loan amount, term, or rate to make a debt consolidation loan that will work for your budget. Access a Debt Consolidation Calculator here or shop for a debt consolidation loan.

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