Paying off debt can be difficult, especially if you’re juggling multiple debts at once.
Fortunately, consolidating your debts can make the process easier. Withyou’re essentially consolidating all of your balances into one loan, which simplifies your payments and, ideally, also lowers your total interest costs.
Are you struggling with multiple debts? See if you qualify for a free debt relief consultation using this simple online tool. The whole process takes less than a minute.
If you want to know more about your debt relief options, in general, here’s a breakdown.
What is debt consolidation?
Debt consolidation consists of merging all your debts into a single loan.
For example, you take out a loan or a line of credit large enough to cover the balance of all your debts. Once approved, you use these funds to fully pay off your credit cards, loans, and other debts. You then only have the new loan and a single monthly payment.
Debt consolidation loans can be a good option if you’re dealing with credit card debt, as they often come with lower interest rates. Credit cards typically have double-digit APRs, so consolidating using a loan or other product can save you both monthly and over the long term.
Online resources can be a good place to start when debating which type of debt relief option is best for your situation. See which option can help you save the most money.
Options for debt consolidation loans
There are several options for consolidating your debt. Some are reserved only for homeowners or those with a mortgage, while others can be used by any consumer.
Here are some of your options:
A personal loan: Personal loans can be a debt consolidation option because you can use the funds for any purpose. However, they may come with higher interest rates than other consolidation options. The average personal loan rate is around 9%, according to the Federal Reserve Bank of St. Louis.
A credit card with balance transfer:are credit cards that typically have an APR of 0% between six and 21 months. You transfer all your balances to the card (there’s usually a 3%-5% fee for this), then pay off the balance before that zero rate period expires. According to the Experian credit bureau, you generally need at least a credit score of 670 or higher to qualify for one.
If you’re unsure of your credit score, you’re not alone. Fortunately, there are easy ways to find out your credit score using FICO’s online tools.
A home equity loan or HELOC: If you own a home, you can use a home equity loan or home equity line of credit (HELOC) to consolidate your debt. These are two second mortgages that allow you to borrow against the equity in your home. Home equity loans come with an upfront lump sum, while HELOCs work more like credit cards, which you can withdraw as needed.
Cash refinancing: This is another option for homeowners. Consolidate your debts with a cash-out, you take out a new loan for an amount sufficient to cover your current balance, as well as your other debts. Remember: there are upfront costs for refinancing. The Freddie Mac Mortgage Purchase estimates this to be an average of around $5,000, although you may be able to build these into your loan balance and pay them off over time.
The eligibility requirements for each of these options will depend on the lender or credit card company you use. You can, however, expect your credit score to play a role (and generally, the higher your score, the better the interest rates you’ll qualify for).
“Generally, you’ll need good credit to qualify for a debt consolidation loan on favorable terms,” says New York debt relief attorney Leslie Tayne. “You may qualify for a high-interest personal loan with marginal credit, but taking out that loan may not improve your financial situation.”
Should you consolidate your debt?
It may be a good idea to consolidate your debt if you have trouble keeping up with your payments or if you can reduce the total interest you will pay long-term.
Keep in mind that there are risks involved in taking out a loan or a line of credit. With mortgages and home equity products, you are borrowing against your home. This could put your property at risk of foreclosure if you fail to make the payments. Not making payments on a loan or credit card will also hurt your credit score, so be sure to only borrow what you need.
You may also want to work on your spending habits to avoid getting into debt again.
As Tayne puts it, “Consolidating your debt won’t solve potentially problematic spending habits. If you tend to spend more money than you make, chances are you’ll accumulate debt again.” significant amount of credit card debt – perhaps before your consolidation loan is paid off.”