High Interest Debt Consolidation Loans - Debt consolidation is the process of combining multiple debts, such as loans or credit cards, into one monthly debt payment. This method of debt refinancing usually involves taking out a new loan, with the ultimate goal of saving time and money for the borrower.
Debt consolidation works by taking out a single loan to pay off multiple existing debts. Once your debt consolidation loan is approved, you'll use the money to pay off other lenders and then work to aggressively pay back the new loan.
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Let's say you currently have debt on two credit cards and a personal loan. Between these three items, you owe $25,000 and pay 21.99% interest compounded monthly.
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To be debt free, pay $750 per month for 52 months. And you'll pay a whopping $13,987 in interest.
Now suppose you have consolidated this debt into a single debt consolidation loan with 10% interest also compounded monthly. To reduce this loan balance to zero, you pay $806 per month for just 36 months. But now only $4,040 of that is in interest.
This means that by taking out a debt consolidation loan, you can save $9,947 with just a slightly higher monthly payment. But it's important to note that you may also have some fees associated with a debt consolidation loan that can eat into those savings a bit.
A debt consolidation loan is a low-interest personal loan that allows you to move multiple credit card balances or loans into one account. Because these loans are unsecured, they usually require a good credit score to get the lowest interest rates.
What Is Debt Consolidation & How To Do It
Borrowers looking for a debt consolidation loan with bad credit may still be eligible, just for a slightly higher interest rate. That's why it makes sense to shop around with several lenders to get the best rate before committing.
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A credit card balance transfer makes sense for borrowers with good or excellent credit scores (above 690 on the FICO scale). This is because these borrowers may qualify for a 0% APR credit card for a certain period of time. And this period can be incredibly valuable for paying off debt without incurring extra interest.
But borrowers with bad credit may still find a balance transfer card useful. Consolidating multiple credit cards into one payment makes sense as long as the interest rate on the new card is lower than the average on existing debt.
When Are Personal Loans A Good Idea?
A home loan and home equity line of credit (HELOC) are secured loans where your home is the security. This means that you borrow money against your equity, and this usually has a lower interest rate than other loan options.
Debt consolidation through a home equity loan can be a smart move when you have significant equity in the home and are obligated to repay the debt. But those who struggle with overspending can put their home at risk if the loan is not repaid on time.
Generally, taking out a loan against a retirement account, such as a 401(k), is a financial no-no. But in the case of debt consolidation, when you can commit to paying off the balance plus interest quickly, it can be worth it.
401(k) loans generally have a low interest rate, plus you pay the loan plus interest to yourself (minus the 401(k) provider's fees, of course). However, the biggest downside to taking out a 401(k) loan is that it can derail your retirement savings plan. Add to that the potential tax implications and fees, and you'll see that it's probably best to review this loan option with a financial professional before using a 401(k) loan for debt consolidation.
What Is Debt Consolidation?
A certificate of deposit (CD) is a savings instrument where you promise to leave money in the account at a set interest rate for a set period. However, you can take out a CD loan with this money, while the CD acts as collateral to secure a personal loan.
Using a CD loan for debt consolidation is a way to spend the money without being penalized for early withdrawal. But not all banks offer CD loans, and you must have an active CD to qualify.
Depending on the types of student loans you have, federal or private, your debt consolidation options look different. For example, you can enter a longer repayment period for federal loans, which lowers your monthly payments, but you usually won't get a lower interest rate.
With private student loans, you can shop to combine several loans into one loan at a better interest rate. And it can provide quite a significant interest savings, especially if your loan balance is high.
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You can roll multiple debts into a cash-out refinance as another type of debt consolidation. With a cash-out refinance, you replace your existing mortgage with one whose higher balance reflects the debt you've added.
Since a cash-out refinance means taking out a new mortgage, there are closing costs and fees to consider. Therefore, you need to calculate the interest savings from debt consolidation plus these costs before pursuing this option.
There are many types of debt consolidation; it is important to go through them all before deciding which type is right for you.
Certain requirements determine eligibility for debt consolidation. But it's important to note that lenders' debt consolidation requirements can vary, and that specific lenders may have more lenient requirements than others.
How To Use A Personal Loan For Loan Consolidation
The savings will vary depending on the type of debt you are consolidating and how much the interest rate changes. You also need to consider the associated fees. Since this calculation can be quite complicated, it's a good idea to use a debt consolidation calculator to find out how much you can save by consolidating your debt.
If you're ready to explore how much you can save with debt consolidation, we're here to help. Check out our debt consolidation calculator to see how much you can save for free!
Debt consolidation may not be a smart move for everyone. It's smart to consult with a financial professional or explore other options if:
As with any major financial decision, there are pros and cons to debt consolidation that you should consider before committing. The benefits of debt consolidation include:
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Choosing the right debt consolidation company depends on the type of debt consolidation you want to pursue. The characteristics of a large personal loan company may differ from a credit card company.
No matter what type of debt consolidation you choose, a good debt consolidation company will be reliable, legitimate, and have a proven track record of helping their clients with debt consolidation. You can verify the legitimacy of a company by checking sites like the Better Business Bureau, checking online reviews, and making sure the company has a website free of security issues and bugs.
Debt settlement differs from debt consolidation because you will be working with a company that strives to close debt with creditors for a fraction of what you owe. Debt settlement companies usually do this without paying your bills, which can cause serious damage to your credit score.
Bankruptcy is usually the last resort for most people in debt. This is because the bankruptcy recovery period lasts for years and effectively destroys your credit. Therefore, if you are considering bankruptcy or debt consolidation, you should first consult with an attorney or financial professional who can advise you on the long-term consequences.
Better Ways To Use Personal Loans
A debt management plan is administered by a credit counseling agency that helps you create an effective repayment plan for your debt. Your credit counselor may also be willing to contact creditors on your behalf to negotiate better interest rates and repayment terms. Typically, you will send a monthly payment to the debt management company and they will distribute it to the lenders accordingly.
There are other options that can help you get rid of your debt, but be careful about the consequences.
Debt consolidation is a useful financial tool for those struggling to manage multiple debts. The process of consolidating debt through a debt consolidation loan or balance transfer credit card can help you simplify debt management. Combining debt consolidation with a well-thought-out repayment strategy means you'll be on your way to debt freedom in no time.
Debt consolidation can work for those who are willing to commit to becoming debt free and have a credit score that qualifies them for a low interest debt consolidation loan. But if someone still hasn't changed the behavior that got them into debt in the first place, debt consolidation may not work.
Personal Loans Vs. Credit Cards: What's The Difference?
The process of
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