If you are struggling with various debts from various sources, you’re not alone. The typical household in the USA has no less than three credit cards with a debt totaling over $13,000, according to Experian. [1]
Worse yet, most people pay back the absolute minimum each month which makes debt seem like a life sentence – but there’s a way out. You can take out a debt consolidation loan and lower your payments.
Here’s what you should know:
Debt Consolidation Loan Basics
Instead of having many different loans, a debt consolidation loan gives you enough cash to pay off all your loans and in return, you get a single loan and a single monthly payment. You can use this approach to pay off payday loans, medical expenses, and credit cards, for instance. But the best part about a debt consolidation loan is that you often get a smaller monthly payment and a lower rate of interest. Before you decide, you should take into consideration these pros and cons.
Pros:
- Instead of multiple payments and loans, you get one payment and one loan
- Simpler to pay on time
- You pay the same each month
- You might get a lower rate of interest
- All the interest is tax deductible
Cons:
- Collateral (car, house) is required for some debt consolidation loans [2].
- People prone to bad financial choices can be worse off if they reduce debt and think they can take out more loans
- Your credit score might drop temporarily because a hard inquiry is necessary
- You might have to pay fees
Balance Transfer Card Vs Debt Consolidation Loan
Another popular option for debt consolidation is a balance transfer card. With this approach, people who have debts on credit cards can transfer their balance onto a lower interest rate card. These cards can be both excellent and a bad choice, but they’re very different from a debt consolidation loan.
Namely, a balance transfer card can only be used for credit card debts and to transfer a balance. On the other hand, you can pay off various debts with a debt consolidation loan including student or auto loans. Furthermore, a balance transfer card can come with fees, and interest rates can skyrocket after a low or no interest promotion is over.
In most cases, a debt consolidation loan is the best solution if you have various types of debt and cannot otherwise pay them off in two or three months [3]. You can also pay more of your principal each month thanks to lower interest rates.
Choosing a Debt Consolidation Loan
By now you know quite a lot about debt consolidation loans, but you might not know which lender and loan is the best option for you. For starters, check out which types of loans you are eligible for by looking online according to your credit score, amount of debt, and type of debt. After that, you can compare and get the best deal! Getting out of debt might seem impossible, but remember – there’s always a way!
[1]https://www.experian.com/blogs/ask-experian/is-a-debt-consolidation-loan-right-for-you/
[2]https://www.nomoredebts.org/blog/debt-consolidation/loans/top-5-reasons-people-are-declined-for-debt-consolidation-loans
[3]https://www.debt.ca/debt-consolidation
