Debt Consolidation
Finding the Best Debt Consolidation Companies
Are you struggling to manage your debt? If you are feeling overwhelmed by the burden of your debt and unable to make on time and consistent payments, you might want to consider consolidating your debt.
Debt consolidation is a debt management strategy that involves rolling one or multiple unsecured debts into another form of financing. Put simply: You take out a new loan or credit card and use it to pay off existing debts with better terms.
Borrowers may consolidate debt for the following reasons:
The reasoning for debt consolidation is simple: The more debts you have, the more difficult it may be to stay on top of your finances. With so many bills to track, it’s easy for something to fall through the cracks — and, thus, hurt your credit score. Consolidating debt helps you keep track of what you owe while granting the potential for lower interest rates than what you currently pay.
Although there are many ways to consolidate debt, it generally works the same way: You pay off one or more debts with another form of debt.
From there, the similarities between the different methods of consolidating debt tend to vary widely. Depending on your unique situation — how much debt you have to consolidate, your credit score, how soon you need the funds, what type of debt you have, etc. — one method may work better for you than another.
Here’s a look at 4 different ways to deal with your debt: Balance transfers, personal loans, home equity loans and debt management plans.
Once you consolidate your debts, regardless of which method you use, you will have one bill to pay. Staying on top of one bill may be less stressful than having multiple bills and debts seemingly chasing you for a payment each month. With installment loans like a personal loan or home equity loan, your interest rate and term are fixed and your payment is the same each month, so the bill is predictable and may be easier to budget to afford.
Ideally, you will use a financial product with a lower interest rate to pay off debts charging a higher rate. The reduction in interest will help you save money you would have been required to pay had you not consolidated your debts. It also saves money on late fees, missed payment penalties and other consequences you may face when you have a difficult time managing debt. Depending on the size of your debt and the difference between the two interest rates, your savings may be worth thousands of dollars.
If you use financing to pay off debts in collections or the balances on your credit cards, you may notice an immediate boost to your credit score. If you use a balance transfer credit card, opening a new card will increase your overall credit limit, reducing your credit utilization ratio — the total amount of credit available to you that you are using up on your credit cards.
Credit utilization accounts for about 30% of your credit score. A healthy utilization ratio hovers between 10% and 30% of your total credit limit. Personal loans and home equity loans don’t have much, if any, impact on your utilization ratio. If you use either of those vehicles to consolidate credit card debt and avoid racking up more credit debt, you may initially see your credit score spike after paying off your credit cards.
The months and years that follow can make the larger difference to your credit score, but only if you don’t rack up more debt as you pay off the consolidated debt. As you focus on paying down the loan, each on-time payment will be recorded and reported to the credit reporting bureaus and the positive activity will help to strengthen your credit score over time. To put the impact into perspective, your on-time payment history accounts for about 35% of your FICO credit score.
Debt consolidation can help you keep track of payments, get a lower interest rate and pay off your debt faster. It’s a smart money move under the right circumstances. You’ll want to weigh your options to see if this is a good idea for your situation.
For example, it might not be worth consolidating if you have a small balance that you can pay off within a year. But debt consolidation is a good idea if you have too many payments to keep up with, or if you can qualify for a lower interest rate.
Consolidating your debt can affect your credit score. There might be a small drop in your credit score after consolidating debt, since you are taking out a new credit product or loan. You might also see a dip in your credit score if you settle a debt or work with a debt management service.
Some borrowers can see their credit score increase by consolidating debt, particularly credit card balances. Using a personal loan to pay off credit card balances will lower your credit utilization ratio, which can give your credit score a boost.
Whatever the initial effect has on your credit score, debt consolidation can help you increase your credit score over the long term. If you choose an option with affordable payments, you can build up a healthy payment history, which is central to a good credit score.
Applicants with good credit will have a wider range of debt consolidation options. They can more easily get approved for loans and will qualify for lower interest rates and fees that will keep them affordable.
Still, there are options for bad credit, and some lenders are willing to work with applicants who have fair credit. Borrowers with bad credit can look for other ways to qualify for a debt consolidation loan. A secured loan might be easier to qualify for, for example, or they could apply for a loan with a qualified cosigner.
There are three primary methods of debt consolidation: personal loans, balance transfers and home equity loans. To learn about your options, you might consider seeking credit counseling for free or low-cost guidance on your debt relief options.
There is no “best” way to consolidate debt, as that will depend on your financial situation.
A debt consolidation loan is a type of personal loan. It’s unsecured, which means it doesn’t require collateral like a car or house. Since there’s no collateral, lenders rely heavily on your credit score, income and debts to determine if you’re a good borrower and set your interest rate.
With a debt consolidation loan, you can combine many types of debts, such as student loans and credit card debt, into one monthly payment.
There may be costs that come with consolidating debt, so it’s important to review all rates, fees and costs for each option you consider. For example, some (but not all) personal loans charge origination fees, while a home equity loan can incur new appraisal fees and closing costs. Even a credit card balance transfer can come with a fee.
Once you decide what type of debt consolidation is best for your situation, you should try to get loan offers. LendingTree offers several tools that can connect you with potential lenders who can meet your needs. You could then compare consolidation offers to see which could give you the lowest costs when you look at both fees and interest rates.
These loans have the potential to save you money, but it’s not a guarantee. Whether you could save money by consolidating debt will depend on your costs and what you’d pay after consolidation. You’ll have the best chance of saving money by consolidating if you use this option to secure a lower interest rate or pay debt off faster.
If your goal is to get out of debt faster, consolidating your debts can be a smart move. Consolidating with a personal loan, for example, can give you the option to choose a shorter loan term, so your debt will be paid off sooner.
Some applicants can qualify for personal loan rates that are lower than what they’re paying on existing debts. This can lower how much this debt is costing them so that more of their debt payments are applied to taking down their balance.
If you want to use debt consolidation to pay off debt faster, keep an eye on monthly payments. A shorter loan term will increase payments, and you’ll want to make sure they’re affordable.
Debt consolidation involves getting a new loan or credit account and using it to pay off existing debt. But there are other options for handling debt. See these debt relief options:
There are several places to seek a consolidation loan. LendingTree tools could help connect you with lenders willing to work with you. They can quickly generate multiple offers in one place, making it easy to compare offers and start your search for the right one.
Here are some other places to look:
Secured loans are types of debt that are tied to an asset you own, called collateral. Home equity loans and HELOCs are common examples of secured debt that can be used for consolidation.
Your collateral property acts as a guarantee for this debt. Because of this, some borrowers can more easily qualify for a secured loan and might pay less in interest. But if you stop repaying the loan, the lender has the right to claim the collateral and sell it to settle the debt.
Unsecured credit doesn’t require that you have or put up collateral for the loan. Types of unsecured debt used for consolidation include personal loans. With no collateral on the line, lenders will rely more on an applicant’s credit score to decide whether to extend a loan and how to set rates.
Consolidation isn’t always the right move. Here are a few situations when you might want to consider other options ahead of consolidating debt:
Your debt would be unaffordable, even after consolidation. When you’re struggling to keep up with payments and your debt has become a crisis, you might need a different solution. This is when you might want to consider a debt relief program that will help you get your debt under control. For some people, filing for bankruptcy might also be worth considering as a way to get relief.