Part of the challenge of managing debt is keeping up with what you owe — to whom you owe it and by which date it needs to be paid. The more lines of credit you’re trying to juggle, the harder it can be to stay current on various accounts. It can also be difficult to decide where to focus your efforts when you’re trying to repay multiple debts, each with its own terms dictating interest rate and penalties. At some point you’ll probably find yourself wondering whether there’s a better way.
Some consumers have found success with debt consolidation. Here’s more on what this process entails and what your options are for taking out a loan.
What Is Debt Consolidation?
Debt consolidation is the process of turning multiple monthly debt repayments into one. How? By taking out a single loan, using it to repay all your other lines of credit, then repaying the loan through monthly installments. Although it may sound like a magic trick, there are both advantages and disadvantages of the strategy to consider.
The upside to consolidation is you may be able to pay less in interest over the course of a loan than you would trying to pay down numerous high-interest debts individually. The interest rate you’re able to secure on a loan depends on your credit standing, income and payment history — so it’s important to crunch the numbers and make sure you’d come out ahead by taking on the loan.
You can expect to repay a consolidation loan over the course of several years, which means you’re committing to making payments consistently each month until it’s paid in full. There’s always the risk you’ll face financial hardship and struggle to come up with the payments, which would leave you in an even worse financial situation.
There are a few routes consumers can take when it comes to taking out a consolidation loan.
Three Types of Debt Consolidation Lenders
You may do your research and decide debt consolidation sounds like a workable solution for your situation. So, the next step is exploring the options available to you.
There are three types of debt consolidation lenders to consider:
- Banks: Most banks offer debt consolidation loans, many of which are advantageous for people with good-to-excellent credit.
- Credit Unions: As Bankrate notes, credit unions are often able to offer lower fees than traditional banks and lenders because they’re owned by members and operate on a not-for-profit basis.
- Online Lenders: A host of online lenders offer consolidation loans to people with a wide range of credit scores and financial backgrounds; the terms can vary widely.
What are the most important factors to consider when you’re deciding between debt consolidation companies?
First and foremost is the annual percentage rate (APR), or the interest rate representing the actual total cost of the loan. Another expense to factor in is the one-time origination fee, which NerdWallet estimates to be between one and eight percent of the total loan amount. The final differentiating factor is the presence or absence of convenience features meant to streamline the process.
Avoiding Debt Consolidation Scams
Avoiding scams is paramount to successfully consolidating your debts. It’s generally a good thing the internet has made it possible to get pre-approval without having to set foot in a financial institution. But before providing any personal information or signing up for any loan, consumers must do their due diligence to make sure they’re working with a reputable lender. Any offer seeming too good to be true or too easy to secure probably comes with a catch.