Is a debt making it hard for you to make ends meet? You are certainly not the only one, as millions of people across the nation are struggling to pay off a variety of large loans. The average household in America has no less than three credit cards that have a balance of $4,427 or are a total of more than $13,000 in debt. (1)
Unfortunately, a lot of people can only afford the minimum payments each month, which can make you think getting rid of debt is practically impossible. However, there is a solution and it comes in the form of debt consolidation loans that lower your total monthly payments. This type of loan could be just what you need.
What Are Debt Consolidation Loans?
With a debt consolidation loan, all your other loans get turned into one with a single monthly payment. Simply put, with this approach you get enough funds to pay back a number of different debts. A debt consolidation loan is best for paying off medical bills, credit cards, and payday loans. Consolidating loans also give you a lower monthly bill and lower interest rate. Using this method simplifies the process of repaying loans and makes everything easier to track.
With that said, debt consolidation loans have their benefits and downside. Check out the pros and cons below to make sure if this is the right solution for you:
- You have one monthly payment instead of multiple ones.
- It’s easier to keep track of just one payment.
- The monthly payment always stays the same.
- You are likely to get a reduced interest rate.
- Interest pay is often deductible on your taxes.
- Collateral, such as your house, may be needed for some loans.
- People bad at finances may spiral by feeling relief then go further into debt.
- Credit card score might be lowered due to hard inquiries.
- Fees might be included in your debt consolidation.
Balance Transfer Cards vs. Debt Consolidation Loans
A balance, or transfer card is another way to consolidate loans and get a lowered interest. These cards are different from debt consolidation loans, and they can both be great and ill-advised, depending on your situation.
The biggest difference between the two is that a balance transfer card will only handle credit card debt (student loans, cars, etc), while a debt consolidation loan can take care of any type of debt. Balance transfer also comes with fees that can be quite high. Other than that, they provide customers with a low or no-interest rate grace period before the fine print kicks in and the rates skyrocket once a promotion ends. This can easily leave you in a worse position than the one you started in.
More often than not, a debt consolidation loan ends up being the smartest choice you can make if you have to take care of a few types of debt. Overall, these consolidation loans also come on average with a lower interest rate so that you can start to pay off the principal.
Choosing a Debt Consolidation Loan
It’s safe to say that now you know quite a lot about debt consolidation loans and might be ready to make a decision. However, you should consider one more thing and that is which debt consolidation loan company is the best?
To begin, check which offers you are eligible for. Research and look online based on the amount and type of debt you owe, as well as your credit card score. Once you find that information, begin comparing various options and terms. Following that, you will need to think about your potential interest rate. which will depend on your credit history and overall score.
Common Interest Rates for Debt Consolidation Loans
Interest rates for debt consolidation loans are not the same everywhere. They vary depending on credit scores, loan terms, and your current interest rates. But nowadays you can expect to pay an interest rate of 18.56% APR (annual percentage rate) for debt consolidation loans. (2) As mentioned, rates can differ and be as high as almost 29% or as low as about 8%. (3) There are exceptions when it comes to this interest range, though. According to Value Penguin, (4) those with a stellar credit card rating can net an interest rate of 4.52%. (4)
The interest rate you get is perhaps the most important thing in a debt consolidation loan, so always compare offers. Additionally, pay attention to loan terms, possible penalties, and fees. You can also ask to be shown how much interest you’ll pay in total. Apply for more than one lender to get the best deal.