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The pros and cons of Debt Consolidation

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The pros and cons of Debt Consolidation
Debt consolidation could be a good idea when you are able to qualify for a low interest rate, and make your payments on time and remain out of financial debt into the coming years.


Last updated on Feb 2, 2023

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If you have multiple debt streams, like high-interest credit cards medical bills, personal loans, debt consolidation can unite them to make one monthly fixed payment.
Getting a or using a credit card for balance transfers can make sense if it lowers your annual percentage. But refinancing debt has advantages and disadvantages -- even with a lower rate.
Quick look at the pros and negatives of debt consolidation
The pros of debt consolidation



Cons of debt consolidation



You could receive a lower rate.
You'll only have one monthly installment.
You could be debt free in a shorter time.
You can build credit.



There is a chance that you won't be eligible to receive a reduced cost.
Incomplete payments can make the situation more difficult.
It doesn't address the root problems with debt.









Pros of debt consolidation
You could get an offer at a lower cost
The main benefit of debt consolidation is paying off your debt with a lower interest rate and thus saves you money.
If, for instance, you have $9,000 in total debt with a combined APR of 25percent and a combined each month's payment at $500, then you'll pay $2,500 in interest over about two years.
But if you were to take out a with an APR of 17% and a repayment period of two years, the new monthly payment will be $445 and you would save $820 in interest.
If you qualify for a , you would not pay any interest during the promotional period that can be up to 21 months. It is likely that you will also be charged the 3%-5 percentage fee for balance transfer.
Check out our site to view your total balance, your total monthly payment, and the total interest rates across all different debts.
You could get out of debt faster
When you consolidate your debt at a lower interest rate you can also make use of the savings you made on interest to pay off of debt more quickly.
Revisiting the example above, your monthly payment will change from $500 to $445. If you don't really need the $55 elsewhere, and you would like to be free of debt as soon as possible You could continue to make monthly installments of $500.
When you add your savings towards your resting balance, you'll ultimately reduce the term of repayment for your loan and save more on interest because you'll have less monthly payments in total.
This option has a greater payoff when you use a balance transfer card. Since you'll not be paying any interest during the promotional period that means the savings you add to your account could be significant.
>> MORE:
There will be only one payment per month
Instead of having to keep an eye on multiple monthly payments or interest charges, consolidating can help you consolidate the debt into one installment with an interest rate that is fixed and doesn't change during the term of your loan (or in the promotion period, in the case of the balance transfer card).
However, it's more than just making your payments easier. Consolidating can give you an easy and encouraging end goal to be debt-free, especially if don't have a plan in place.
You can build credit
Applying for a new form of credit requires a hard inquiry into your credit score, which may be a temporary reduction in your credit score of a few points.
However, if you pay your monthly bills on time and completely, the overall effect should be positive, particularly when you consolidate credit card debt.
Repaying credit card debt reduces your score , which is among the major factors that affects your score.
>> MORE:
Find out if you're pre-qualified for an individual loan without impacting your credit score
Just answer a few questions to receive personalized rates from a variety of lenders.


The loan amount
on NerdWallet








The cons of debt consolidation
There is a chance that you won't be eligible to receive a reduced rate
Balance transfer cards can be difficult to obtain and generally require outstanding credit (690 credit score or more).
Consolidation loans are easier to access and available, as are loans specially designed for applicants with poor credit (629 credit score or lower). However, those who have the highest scores typically receive the lowest rates.
>> COMPARE:
If the lender cannot provide a better rate than your current debts, debt consolidation usually isn't a good idea. In this instance, think about other debt repayment strategies similar to the methods.
It is possible to fall behind on payments
If you fail to pay this new credit card, you could find yourself in worse place than when you began.
For instance, if fail to pay off your balance transfer card within the promotional period with zero interest then you'll be liable for it with a higher interest rate which could be higher than the initial debt.
If you default on a consolidation loan, you could rack up late fees, and your missed payments could be reported to the credit bureaus, threatening your credit score.
Before consolidating, be sure your new monthly payment is perfectly within your budget for the entire payment period.
You haven't addressed the root problem
While consolidation can be a useful tool, it isn't the only solution for ongoing debt and doesn't address the causes that caused debt in the first place.
If you are struggling with excessive spending it is a risky option. If you take out a loan to pay off credit cards, for example, those cards will have no balance. You may be tempted to make use of them prior to the new debt is paid off, digging you into an even deeper hole.
>> MORE:
If you're in debt some debt, you're better off consulting a at a reputable nonprofit who can help set up a debt management plan instead of tackling the issue on your own.
How to get the debt consolidation loan
Getting a debt consolidation loan involves searching around for the best loan, which is usually the one that has the lowest interest. Certain lenders allow you see rates that could be offered without affecting the credit rating.
Here are three places to find the perfect loan to consolidate debt: loan:
Credit unions typically offer lower interest rates for consolidating debt loans for fair- or bad credit borrowers. You'll need to become a part of the credit union prior applying.
Banks also offer loans for debt consolidation, but existing customers and borrowers with excellent or good credit are more likely to be approved.
Online lenders provide debt consolidation loans to all credit brackets. However, you must ensure that the APR is less than the total interest rate of your current loans.

When you've located the ideal loan and are ready to apply, gather the personal details you need, such as proof of identity, Social Security number and income proof to be submitted to complete the application. The majority of applications are online and take only a few minutes to complete.
Depending on the lender that you select, loans can be funded the day you're approved or in a week.
>> MORE:
NerdWallet has evaluated the personal loan products from more than 35 institutions. Below is a list of lenders that provide the most effective credit consolidation loans.
Lender



Credit bracket



The Best Option for



APR range



The ratings of NerdWallet are based on the opinions of the editorial staff. The scoring formula is based on the factors we believe to be beneficial to the consumer, such as impact on credit score, fees and rates as well as the customer's experience and responsible lending practices.

on the Discover website.






Excellent to great.


Fast and quick funding.


6.99% - 24.99% .


The ratings of NerdWallet are based on the opinions of our team of editors. The scoring formula is based on factors we consider to be friendly to consumers, such as the impact on credit score, rates and fees, customer experience and responsible lending practices.

on the SoFi's website.






Good to excellent.


No cost.


7.99% - 23.43% .


NerdWallet's ratings are determined by the editorial staff. The scoring formula considers aspects we consider to be beneficial to consumers, including the impact on credit scores, rates and fees, the customer experience and ethical lending practices.

on LightStream's website






Good to excellent.


Low rates.


6.99% - 23.99% .


NerdWallet's ratings are determined by our team of editors. The scoring formula takes into account aspects we believe are friendly to consumers, such as the impact on credit score, fees and rates, customer experience and ethical lending practices.

on the Happy Money website.






Fair.


Paying off your credit card debt.


7.99% - 29.99% .


NerdWallet's ratings are determined by our editorial team. The scoring formula is based on aspects we believe are friendly to consumers, such as the impact on credit score, rates and fees customers' experience, and ethical lending practices.

on the website of Upgrade.






Bad.


Direct payment to creditors , with discount.


8.49% - 35.97% .


The NerdWallet ratings are decided by our editorial team. The scoring formula considers aspects we consider to be beneficial to consumers, including impact to credit score, rates and fees, customer experience and responsible lending practices.

on Upstart's website






Bad.


Borrowers with little credit history.


6.50% - 35.99% .










Author bio Jackie Veling covers personal loans for NerdWallet.







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