Debt consolidation loans are a popular loan option for people who have multiple unsecured debts. Whether those debts are student loans, credit card balances, medical bills, or unsecured personal loans, debt consolidation loans can make it simpler to manage accounts and can save borrowers money in the long run.
How Do Debt Consolidation Loans Work?
A debt consolidation loan is a loan which is borrower to pay against all other loans, or a certain number of loans, a person might have. You might have 5 different credit cards, all with various interest rates, due dates, and balances. A debt consolidation loan would pay off all your credit card debt and then you would have one new loan with a new total balance of all your debts. A debt consolidation loan is one way of consolidating your debt, with the other two being a debt management plan, or debt settlement.
What Are the Perks of Debt Consolidation Loans?
There are several benefits to debt consolidation loans:
- It can save you money: Those with higher interest loans, like credit cards, will likely benefit from getting a debt consolidation loan. Most of the rates offered are highly competitive, especially compared to some credit cards. Just dropping the interest rate a little can save a person a lot of money over the long term.
- You might be able to pay off the balance faster: Instead of paying off a credit card potentially for years without making any headway, those who get a debt consolidation loan can set it for a specific amount of time. If they continue to make their payments faithfully, when their time is up, their debt will be too.
- It can save time and effort: Paying several different companies each month is a waste of time and energy. With debt consolidation loans, people make one monthly payment instead of a number of payments to various companies. It makes it easier to manage payments, and in this busy world, simplicity is always welcome.
Are There Any Drawbacks to Debt Consolidation Loans?
The biggest drawback to pursuing debt consolidation loans is the risk of not controlling spending while repaying it and racking up new debt. For those who are solely rolling multiple student loans into a debt consolidation loan and are finished with school now, that won’t be a problem at all.
But those who are rolling over a mixture of student loans, personal loans, and credit card debt, may find themselves in real financial trouble if they quickly run up the balance of their credit cards again after they go through with the debt consolidation loan.
How Can I Obtain a Debt Consolidation Loan For My Credit Cards?
There are four main ways to obtain a debt consolidation loan for your credit cards
- Credit Card Balance Transfer: Often times credit card companies will offer teaser rates as low as 0% for the first year when transferring balances over to their card.
- Personal Loans: You can obtain a personal loan to pay off your credit cards. If your credit is good your personal loan should have a much better interest rate than your credit cards.
- Home Equity Line of Credit: A line of credit is another way to consolidate your credit card debt. You would need to put your home as collateral for this.
- 401(k) Loan: You can borrow against your 401(k) to pay down your credit card debt. This is a bit risky and can mess with your future security, so consider this with caution.
Read more on how to consolidate credit card debt.
Will I Be Guaranteed a Low-Interest Rate?
The interest rate a consumer is offered for debt consolidation loans depends largely upon their credit score – that magic number they’ve earned over the years that shows how fiscally responsible they’ve been up to this point.
Those who have higher credit scores will be able to land lower interest rates than people with lower credit scores will. But if a person is dealing with double-digit interest rates from credit card debt, they should be able to find a debt consolidation loan which will beat that.
What Debt Consolidation Loan Options Are There For Student Loans?
Students who are up to their eyeballs in student loan debt do have options they can pursue.
William D. Ford Consolidation Loan
For borrowers with multiple federal student loans, the William D. Ford consolidation loan is an option. This loan can be a good choice for students who have more than one federal student loan and are looking to save on their combined monthly payments.
Private Lenders
Borrowers also have the choice of going with a private lender for a debt consolidation loan. But because the interest rates can vary substantially, borrowers should shop around to find the best deal they can. That can mean a big difference when it comes to how much money they save. Check out these private student loan lenders who would be able to consolidate your student loan debt:
Things to Consider Before Going with Debt Consolidation Loans
Before borrowers agree to a debt consolidation loan, they need to figure out whether it’s the right move for them. Here are some factors to consider:
How much money they’ll save
Borrowers should look at the interest rates on any potential debt consolidation loans and weigh them against what they already have. They should also look at any costs and fees associated with the refinancing that could chip away at what they’ll save.
Another financial consideration is whether the loan is based on a variable rate or a fixed interest rate. That can mean a big difference in the amount they’ll eventually have to pay off.
Whether They’ll Miss Out On Loan Forgiveness
Those who work for a non-profit organization or for government organizations should check out whether they qualify for loan forgiveness. If so, all it takes is 10 years of making payments before their loans or some of their loans will be forgiven.
Borrowers should get to work crunching some numbers before they consider giving up that perk if they qualify.
If an Income-Driven Repayment Plan Is Needed
Those who take entry-level positions to work their way up in their respective fields aren’t going to be earning big paychecks fresh out of college. That means they may have a more difficult time making large student loan payments without taking on a second part-time job.
Those who know they’ll have a hard time swinging a hefty payment each month should check if their new plan allows income-based repayment. With this plan, the amount a borrower pays every month is based on the income they make.
Whether They May Need a Deferment or Forbearance
It’s hard to predict what may happen down the road from a financial perspective. But if there is a chance a borrower will need a forbearance or deferment at some point, they’ll want to check with their private lender to see what the policy is on that before switching loan providers.
Federal student loans generally offer generous policies for deferments and forbearances, while the private lending companies often aren’t as lenient.
Do Your Homework
The bottom line is that debt consolidation loans are serious matters and should be given careful consideration before any decisions are made. Although they can be great options, it’s important to find one that’s right for a borrower’s particular situation.
