Debt Consolidation: Who Needs It?

Most Americans are happy to learn about these debt consolidation loans that can cut their payments in half.

Do you have debts from credit cards, home loans, personal loans, or car loans? Are you having a hard time paying it off? You are definitely not alone. According to reports from Experian, the average US household has at least three credit cards and carries an approximate balance of $4,400 on each. All three of which may sum up to more or less $13,000.

People often rely on their credit cards when they don’t earn enough money to cover all of their living expenses. This is a reason why they only manage to pay the balance minimum amount due rather than the entire amount. The result is that interest accumulates and it becomes nearly impossible to pay off the debts. One option in this scenario is a debt consolidation loan. A consolidation loan can give financial relief to people with debts by lowering the monthly dues.

What is a debt consolidation loan?

A consolidation loan works by rolling all the debts into one single loan. By getting a debt consolidation loan, you pay off all of your credit card debt and now only own money to the company that offered you the loan. All of your debts are combined into one simple monthly payment. It is much easier to keep track of one loan and multiple different loans.

An advantage to consolidation loans is that they offer lower monthly payments because of a reduced interest rate. The gives you the ability to pay off the loan quicker than expected.

Just like any other loan, debt consolidation loans have their advantages and disadvantages. So, it is ideal to weigh these first before applying for one.

Advantages:

Instead of paying different institutions with different interest rates each month, all of your debts will be rolled to a single loan.
It makes it easier to make your payments on-time.
The monthly payment amounts never vary.
Interest paid can be tax-deductible.
It may offer a lower interest rate.

Disadvantages:

Collateral (home or car) may be required prior to approval.
Bad financial habits can exist if you think that your debts have been reduced.
A hard inquiry may be needed on the credit report. This may negatively affect your credit rating.
There might be associated fees to apply.

Debt Consolidation Loan vs. Balance Transfer Card

A debt consolidation loan can appear similar to a balance transfer but they are not the same. One of the differences is that a debt consolidation loan exists to pay off outstanding debts or balances. On the other hand, a balance transfer can only take care of the balances or debts made from a credit card. Car loans, student loans, and other loans cannot be applied to balance transfer.

There are also disadvantages associated with a balance transfer card and one is a transfer fee. These transfer fees can get quite expensive and need to be paid off in addition to the debt. The usual marketing technique of most credit card companies is to offer low to no interest introductory rate for a short period of time.

Keep in mind that the interest rate may go up drastically after the promotional period. With this happens you can end up paying a high interest rate for the debt transferred and in the end you might not save any money.

On the whole, a debt consolidation loan could be a smart move for people with varying kinds of debt who want to simplify their repayment schedule. Rolling everything into a single monthly payment can improve your financial situation, especially when the interest rate is lower.

Choosing Where To Apply for Debt Consolidation Loan

Now that you understand more information about this loan type, you can decide if it makes sense for you to apply. But where should you apply?

The first thing to take into account is which kind loan you can qualify for. It will require information such as the amount to be borrowed (total debt), type of debts and credit score. You will need to compare the loans offered by different financial institutions to select the one that best meets your needs.

The Average Interest Rates

Debt consolidation loan interest rates differ from one another as it will be based on the current interest rate, your credit score, and your chosen terms. The current average APR is 18.56%. The interest rate can range as low as 8.31% to as high as 28.81%.

The interest rates will be lower if you have a good credit score. According to Value Penguin, it can even be possible to an interest rate as low as 4.52%.

A loan is all about the interest rate as it will determine the total amount you need to pay each month. Make sure that you take time comparing the different offers. Aside from that, loan terms, fees, penalties, and repayment options should also be reviewed to ensure you can get the most competitive rate and terms.