Debt Consolidation

The Pros and Cons of These 4 Debt Consolidation Options

debt consolidation options

Having many different kinds of debt can get confusing, even if you’re just trying to stay above water. Managing many different accounts, lenders, interest rates and due dates may feel overwhelming or make it hard to tabs on everything.

If that’s your case, you may want to consider debt consolidation. This method allows you to combine all your debt into one easy-to-manage payment, with one interest rate and monthly due date. Click below to learn more:

Is debt consolidation right for you?

4 debt consolidation options: Pros and cons

  1. Personal loan
  2. Balance transfer credit card
  3. Home equity loan or HELOC
  4. Debt management relief

Bottom line

Is debt consolidation right for you?

Think about how you manage your monthly bills and financial obligations. If you’ve ever missed a payment deadline or confused your minimum monthly dues, you may have gotten charged fees because of it. You may have already been struggling as it is, so the more money that’s taken away from you, the harder it is for you to make good on your other bills.

Debt consolidation is a good idea if you have a hard time keeping track of what you owe, and where you owe it, on a regular basis. By combining your debts, you could end up having just one monthly payment to make instead of several.

Consolidation could also lower your overall costs of borrowing, assuming you can nab a lower interest rate with a lender that offers fewer fees. A lower rate could also mean lower monthly payments. For cash-strapped borrowers, consolidating debt would also allow you to choose a longer repayment term. Although that could come with a higher overall cost of borrowing, it could further reduce your payments so you have more cash for other priorities.

4 debt consolidation options: Pros and cons

Debt consolidation isn’t one-size-fits-all. In fact, you have a few different ways to consolidate your debt, depending on what kind of debt you have and how much you owe.

Before jumping into one type, make sure to check out all your options first.

Debt consolidation option Pros Cons
Personal loan
  • Consolidates many different kinds of debt.
  • Can lower interest rates.
  • May lower monthly payments.
  • Lots of fees.
  • Missed payments hurt your credit score.
  • Not every debt qualifies.
  • Can be hard to qualify for.
Balance transfer credit card
  • Eliminates interest payment for a certain amount of time.
  • Credit score can increase since credit utilization is lowered.
  • Unpaid balance could grow when interest kicks in.
  • Full balance isn’t guaranteed to transfer over.
Home equity loan/HELOC
  • Lower interest rate since it’s a secured loan.
  • Quick to get and manage.
  • Could lose your house if you miss payments.
  • May not qualify for enough to pay off debt.
Debt management
  • Negotiate for lower payments
  • Create a payment plan.
  • Usually there’s a charge for services.
  • Easy to fall for scammers.

1. Personal loan

Getting a personal loan may be a good option when consolidating different types of debt. Pretty good credit could get you a decent interest rate, and funds can be transferred to you within a day. More than 60 percent of borrowers that are taking out personal loans use them to consolidate debt or refinance their credit cards.

Pros

  • Lower interest rates: Depending on your credit score and other factors, you may qualify for a lower interest rate on your personal loan than what you currently have on your debt.
  • Lower payments: With a potentially lower interest rate could come lower monthly payments. You also have the option of extending your repayment term to lower payments. However, you’d pay more in interest over time.
  • Easy to qualify: While a great credit score will get you a lower interest rate, there are still lenders who are available if you have less-than-stellar credit.

Cons

  • Fees: Many lenders charge fees, like an origination fee or late payment fee, which can be easy to fall for if you aren’t looking out for them.
  • Not every debt qualifies: You may not be able to consolidate all your debts in this method — for example, student loan debt isn’t eligible.
  • Missed payments are harmful: Even one missed payment could cause your credit score to plummet.
  • Can be hard to qualify for: A personal loan with a low interest rate can be hard to qualify for. This financial product is unsecured, meaning you don’t have to put down collateral to qualify. That means qualifying for a good rate with less-than-stellar credit could be difficult, if not downright impossible.

2. Balance transfer credit card

If you’ve got a decent amount of credit card debt, moving your outstanding balance to a new card can give you a chance to pay off that high-interest balance.

Pros

  • 0% APR: Many credit card companies offer a 0% introductory APR, which generally lasts anywhere from 12 to 21 months. This gives you a good amount of time to pay off your outstanding debt without worrying about interest adding up.
  • Credit score can rise: Since your credit utilization will decrease, your credit score could see a boost.

Cons

  • Short repayment timeline to avoid debt: A 0% APR may only be a good option if you can repay the debt before the promotional period ends. If you carry a balance afterward, you could start to pay interest on what’s left.
  • Not all debt is guaranteed: You may not get approved to transfer your entire balance over to a new card. This means you’re still responsible for paying down debt on your cards that have interest, as well as your new card.
  • High credit score needed: If your credit score isn’t great, you’ll have a hard time qualifying for a new credit card.

3. Home equity loan or HELOC

A home equity loan or home equity line of credit (HELOC) is a great way to borrow money if you’re a homeowner. Equity is the principal balance on your mortgage minus the worth of your home. You can use a loan or line of credit to make improvements to your home and potentially increase its value, but you’re also able to pay off other debt with it.

Pros

  • Lower interest rate: Since the loan is backed with the security of your home, you can score a lower interest rate compared to an unsecured loan, like a personal loan.
  • Easier to get: Less paperwork is required with a home equity loan, mostly because your home is used to back you up. These loans may not have any of the application fees or closing costs that you would get with a mortgage.

Cons

  • You could lose your home: Falling behind on payments can cause you to default on your loan, and possibly get your house foreclosed on.
  • Low qualifying amount: If you haven’t been in your home that long, you may not have enough qualifying equity to pay off your outstanding debt.

4. Debt management relief

There are a slew of local and online debt relief programs that can help you manage your debt. These companies or organizations work on your behalf to lower your interest rates, monthly payments, or get your debt wiped out altogether.

Pros

  • Can negotiate lower payments: These agencies work with you by contacting your lenders on your behalf. They’ll negotiate with them to help lower your payments or consolidate all your debts into one manageable payment.
  • Craft a personalized payment plan: Not all your creditors work together to make sure you can pay your debt on time. But a company working on your behalf can make sure you’re paying what you can afford with a personalized debt repayment plan that works for you.

Cons

  • May charge fees: While some budgeting and counseling might be free, many agencies charge fees for their debt management services. It’s usually lumped into the monthly payment you make to them that then gets distributed to your debt collectors, lenders, or other credit issuers.
  • Beware of scammers: There are some scammers that prey on people who are looking for debt relief. They look like they’re going to help, but instead charge you money but don’t do any of the work to relieve your debt. Some legitimate companies may also use predatory practices, so beware of them as well.

Bottom line

Since not all debt is created equally, it’s not fair to think it’ll get repaired equally. Before jumping into debt consolidation, make sure you check out all your options first.

With credit card debt, for example, you could try a balance transfer. If you have more than a balance transfer would approve — or you won’t be able to repay the debt within the promotional period — a personal loan may be the better option. For homeowners, a home equity loan or line of credit could save you more on interest, if you’re comfortable with using your home as collateral. And if you’re deep in the weeds, seek expert debt management relief for major help.

If you have many different types of debt, see if your option allows it all to be consolidated. If you have low or no credit, see if you qualify for your debt consolidation choice before making your decision.

 

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