Debt consolidation is the process of taking one or several unsecured debts, usually credit cards, personal loans, and/or medical debt, and paying off all of these debts with a personal loan, balance transfer, home equity line of credit, or a cash out mortgage refinance.
Who should consolidate debt?
Anyone that has multiple unsecured debts with high interest rates should look into consolidating that debt into a single payment at a lower interest rate. Getting a lower interest rate is key to saving money each month, paying off the debts sooner, and eventually being free of this debt so you can move on to achieving other financial goals.
In order to qualify for a debt consolidation personal loan you will need a credit score of around 660 or better. If you are a homeowner with equity in your home, you can apply for either a home equity line of credit (also known as a HELOC) or a cash out mortgage refinance, both of which tend to have far lower interest rates than a credit card or personal loan. A credit card balance transfer is another option, but can only offer temporary payment relief.
How it works?
1 - Look at your debts
You need to know your account balances and what interest rates you are currently paying.
2 - Review your options
Consider all of the loan, mortgage, and credit card transfer offers to see which best fits your situation and will save you the most money.
3 - Stay on track
Once you’ve consolidated your debt, you must make your payments and use whatever you save each month by consolidating the debts to pay down the balance.
Which Debt Consolidation solution is right for you?
Figuring out which debt consolidation option is right for you depends on your individual situation. If you are a homeowner with equity in your home, then a HELOC or cash out refinance is a great option. If you have a good credit score and the income to qualify for a debt consolidation personal loan, then that may be your best option. A credit card balance transfer is usually only a temporary relief with a low introductory interest rate, but if you are disciplined about your spending and pay down your balance a little each month it can allow you to pay down your total debt.
Are there alternatives to Debt Consolidation?
Not everyone is a good fit for a debt consolidation personal loan, home equity line of credit, or even a credit card balance transfer because they may not meet the standards necessary for approval. Oftentimes an individual doesn’t qualify because their credit score or income isn’t high enough to meet the underwriting standards of that lender. If you have experienced financial hardship, such as job loss, divorce, medical issues, loss of a small business, or something else, but you have a regular income and the desire to tackle your debt, then you might be a good candidate for debt settlement. Debt Settlement will negatively impact your credit score, but if you are looking at several years of struggling to eliminate your debt, then debt settlement may be for you. Debt Settlement companies negotiate with your creditors to reduce your debts and charge you a fee for each account they settle for you. This option is faster (2-4 years) and can reduce your monthly costs immediately.
If you don’t have the income or credit score for a consolidation loan or debt settlement you may need what many consider the nuclear option in debt management—bankruptcy. If your situation is really that dire, and you have no other options then it can be a good last resort.
Answers to debt consolidation questions
Will debt consolidation hurt my credit score?
Any time you apply for a line of credit it can affect your credit score. If you are able to save by getting a lower interest rate on your debt and can start to pay it down then the impact to your score will be worth it. You should be able to see if you pre-qualify or are pre-approved for an offer with just a soft pull of your credit, which doesn’t show as a credit inquiry. Once you officially apply for the loan or credit card and go through underwriting, they will do what’s called a hard inquiry that will show up on your credit profile.
Who qualifies for debt consolidation loans?
Many factors come into the evaluation of an individual’s credit worthiness and any offer of credit, namely: credit score, verifiable income, and amount of other outstanding debts. Additionally, each company has their own standards for evaluating credit worthiness, which is why you could be qualified for something at one place and not at another. If you don’t know your credit score, you can get it for free at Creditkarma.com, LendingTree.com, and others.
Are there ways to lower my interest rate on a debt consolidation loan?
Yes. Many personal loan lenders offer discounts on the interest rate if you add a co-borrower, have a certain amount of retirement assets, or by having the lender pay your creditors directly.
What kind of debt can be consolidated?
Any credit card, high interest loans, or medical debt can be consolidated into either a consolidation loan, home loan, or balance transfer. Student loans can be consolidated as well, but would require an entirely different consideration as you may lose federal student loan benefits if you refinance with a private lender.
Why consolidating your debt?
The goal of debt consolidation is to lower your overall interest rate to save money each month, allowing you to pay off your overall debt amount faster.