The pros and cons of Debt Consolidation
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The pros and cons of Debt Consolidation
Debt consolidation could be an option when you are able to be eligible for a low-interest rate, pay your bills punctually and avoid the burden of debt in the future.
Last updated on Feb 2, 2023
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If you’re in the middle of multiple streams of debt, such as high-interest credit cards medical bills, personal loans consolidating debt can unite them to make one monthly fixed installment.
Getting a or using a balance transfer credit card is a good idea when it reduces your annual percentage. But refinancing debt has advantages and disadvantages — even with a lower rate.
Quick look at the pros and cons of debt consolidation
Pros of debt consolidation
Cons of debt consolidation
You could get a lower rate.
You’ll only have one monthly payment.
You can get out of debt faster.
It is possible to build credit.
It is possible that you will not be eligible for a lower cost.
Missed payments could make things more difficult.
It doesn’t address the root problems that arise from debt.
Benefits of debt consolidation
You could get an offer at a lower cost
The main benefit of debt consolidation is paying off your debt at the lower rate of interest, which saves money.
For instance, if you’re carrying $9,000 of total debt with a combined APR at 25%, and payments of 500 dollars per month, you’ll be paying $2500 in interest over the course of two years.
If you borrow a loan with APR of 17% and a two-year repayment term, the new monthly payment would be $445. you would save $820 in interest.
If you are eligible for a , you will pay zero interest during the promotional period, which can run for up to 21 consecutive months. You’ll likely also pay the 3%-5% balance transfer fee.
Utilize our tool to check your total balance, your total monthly payment, and the total interest rate for all your different debts.
You can be debt free in a shorter time
When you consolidate your debt at a lower interest rate it is possible to use the money you saved on interest to get out of debt faster.
Revisiting the example above, your monthly payment could increase between $500 and $445. If you don’t really need the $55 in other places, and you want to get out of debt as soon as possible You could continue to make monthly payments of $500.
By applying your savings to the outstanding balance you’ll eventually reduce the term of repayment for your loan, which could save even more money on interest, as you’ll be making less monthly payments in total.
This strategy has an even better return on investment with the account that allows balance transfers. Since you’ll not be paying anything in interest throughout the promotion period, the savings you apply to your account could be substantial.
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You’ll have just one monthly installment
Instead of having to keep an eye on numerous monthly payments or interest charges, consolidating can help you combine the debt into one installment with an interest rate that is fixed and will not change throughout the duration of the loan (or for the duration of the promo period for an account that allows balance transfers).
However, it’s more than just simplifying your repayments. Consolidating your debt can provide you with a clear and motivating finish line to being debt-free, especially if you do not have a strategy that you have in place.
It is possible to build credit
Applying for a new form of credit will require a inquiry into your credit score, which may temporarily lower your score by a few points.
If, however, you pay your monthly bills punctually and completely, the overall impact should be positive especially in the case of consolidating credit card debt.
The process of paying off your credit card balances decreases your score. This is one of the biggest factors that determines your score.
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Check if you are pre-qualified for an individual loan and it will not affect your credit score
Simply answer a few questions to get personalized rate estimates from multiple lenders.
The loan amount
on NerdWallet
Con and cons of debt consolidation
There is a chance that you won’t be eligible to receive a reduced rate
Balance transfer cards can be difficult to get and usually require good to good credit (690 credit score or higher).
Debt consolidation loans are more readily available, and there are loans specifically designed for those with bad credit (629 credit score or lower). However, those with the highest scores usually receive the lowest rates.
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If the lender isn’t able to provide a better rate than your current debts generally, debt consolidation isn’t an ideal option. In this case, consider another debt payoff strategy such as the other methods.
You could fall behind on the payments
If you miss payments toward this new credit card, you could end up in a much worse place than when you began.
For instance, if do not pay off the balance transfer credit within the promotional period with zero interest then you’ll be liable for it with a higher interest rate — potentially higher than the initial debt.
If you fall behind on an installment loan, you could incur late fees and your missed payments could be reported to credit bureaus, which could negatively impact your credit score.
Before consolidating, be sure the new monthly installment fits comfortably in your for the entirety of the time period of repayment.
You haven’t addressed the primary issue.
Although consolidation is an effective tool, it isn’t an absolute solution to recurring debt, and it doesn’t address the behaviors that led to debt in the first place.
If you have trouble balancing your spending consolidating your debt could be a risky choice. When you take out an loan to repay credit cards for instance, the credit cards will carry no balance. It is possible that you will take advantage of them until the new debt is settled and you’ll be in deeper and deeper holes.
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If you have some debt, you’re better off speaking with an accredited nonprofit that can help you set up the right debt management strategy instead of tackling it by yourself.
How do you get a debt consolidation loan
Getting a debt consolidation loan includes shopping around for the most suitable loan, which is usually the one with the lowest rate of interest. Certain lenders allow you see rates that could be offered without affecting your score on credit.
Here are three places to look for an opportunity to get a loan to consolidate debt: loan:
Credit unions typically offer lower interest rates on consolidating debt loans for fair or poor-credit borrowers. You’ll have to be an active members with the credit union before applying.
Banks also offer loans for debt consolidation, however, existing customers and borrowers with good or excellent credit scores are most likely to be accepted.
Online lenders can provide credit consolidation loans to all credit brackets. It is important to make sure the APR is less than the combined rates of your current loans.
When you’ve located the ideal loan and are ready to apply, gather the personal details you need, such as identification proof, Social Security number and income proof that you’ll provide to complete your application. Many applications are available online and require only few minutes to complete.
Based on the lender you select, loans can be funded on the same day that you’ve been approved or within one week.
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NerdWallet has reviewed individual loan products from more than 35 institutions. Below is the list of lenders that provide the most effective debt consolidation loans.
Lender
Credit bracket
Best for
APR range
The ratings of NerdWallet are based on the opinions of our team of editors. The scoring formula takes into account the factors we believe to be beneficial to the consumer, such as impact on credit score, rates and fees, customer experience and responsible lending practices.
on Discover’s site
Good to excellent.
Fast funding.
6.99% – 24.99% .
NerdWallet’s ratings are evaluated by our team of editors. The scoring formula considers aspects we believe are beneficial to the consumer, including the impact on credit score, rates and fees as well as the customer’s experience and responsible lending practices.
on SoFi’s website
Good to outstanding.
There are no fees.
7.99% – 23.43% .
The ratings of NerdWallet are based on the opinions of the editorial staff. The scoring formula considers aspects we consider to be a good choice for consumers, such as the impact on credit scores rate and fees, customer experience and responsible lending practices.
on the LightStream website
Good to excellent.
Low rates.
6.99% – 23.99% .
NerdWallet’s ratings are determined by our editorial team. The scoring formula takes into account the factors we believe to be beneficial to the consumer, including the impact on credit score, fees and rates as well as the customer’s experience and responsible lending practices.
on the website of Happy Money.
Fair.
The process of paying off your credit card debt.
7.99% – 29.99% .
NerdWallet’s ratings are determined by the editorial staff. The scoring formula is based on aspects we believe are consumer-friendly, including impact to credit score, fees and rates customers’ experience, and ethical lending practices.
on the website of Upgrade.
Bad.
Direct payment to creditors with discount.
8.49% – 35.97% .
The ratings of NerdWallet are based on the opinions of our team of editors. The scoring formula takes into account the factors we believe to be beneficial to consumers, including the impact on credit score, rates and fees customers’ experience, and responsible lending practices.
on Upstart’s website
Bad.
People with poor credit histories.
6.50% – 35.99% .
Author bio Jackie Veling covers personal loans for NerdWallet.
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