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Debt Consolidation Loan Alternatives
If you have debts from multiple lenders, a debt consolidation loan isn’t your only option for renegotiating your monthly payments or interest rate. One common alternative is to open a new credit card with a 0% interest introductory offer and to transfer your existing debts onto that card. At least for a few months, you just need to make your card’s minimum monthly payment and you won’t be accruing interest. However, beware that credit card interest rates can be much higher than rates for a debt consolidation loan once the promotional introductory period ends.
For homeowners, another option is to take out a home equity loan, home equity line of credit (HELOC), or cash-out refinance. These loans typically have longer repayment periods and lower interest rates than debt consolidation loans. However, keep in mind that you must have a certain amount of equity in your home to qualify. In addition, if you cannot pay off your loan, you risk losing your home.
Other alternatives include renegotiating with your creditors or declaring bankruptcy. These are typically less desirable than a debt consolidation loan since they will hurt your credit score. Overall, it’s important to think about how much lower your monthly payments or interest rate will be with a debt consolidation loan as compared to alternative methods for paying off debt. You will also need to think about whether it’s only your credit score that’s at risk if you cannot pay back your debt, or also an asset like your home.
What is a Debt Consolidation Loan?
A debt consolidation loan is simply a process by which you use one source of money to pay off the balance owed to multiple debtors. So, for example, you could have three credit cards with outstanding balances, a student loan, and a personal loan, all with balances that need to be partially paid out each month. A debt consolidation loan takes care of all of these debts and rolls them up into a single, more manageable monthly payment that can be lower than the previous payments you were making combined. When done right, debt consolidation loans can help clear up your debt and potentially improve your credit over time.
What are APRs, and How Will a Lower One Help Me?
APR is on of the most important factors to consider when comparing and considering debt consolidation loans. APR refers to an annual percentage rate, and it's not exactly the same as interest rates. Here's the main difference:
- Interest rate: The percentage you’ll be charged by a lender for supplying you with a loan
- APR: Includes the interest rate AND any fees charged by a lender when taking out a loan
So, an APR really gives you a broader scope of how much it’ll cost you to take out a loan. What this means is that the lower the APR you can get, the less you’ll be paying out over the life of your loan. In short, a lower APR means less money paid out of your pocket. That’s good news for the borrower.
How Does a Debt Consolidation Loan Work?
Debt consolidation loans are convenient for people, whether you’re good at math or not. If the numbers have got your head spinning, here’s how it works:
Let's say you have 3 credit cards on which you owe $1000 each.
Three credit cards X $1000 each = $3000
You also have $55,000 in student loans to be paid off and a private loan that you took out (to fund a dream destination vacation to the Bahamas) for $15,000. That’s another $70,000 in outstanding loans.
Each month, you’ll have to pay out a certain percentage (according to the minimum payment requirements and the APR subject to the specific loan) of the amount owed to each lender. So, you might have to pay out $100 to American Express, $100 to Visa, and $100 to MasterCard. Then, you also have to pay $200 towards your student loan and another $100 towards your private loan.
Altogether, these payments come out to $600 per month. The payments are deducted from your overall balance, and this continues until you’ve paid off the entire debt amount. Now, here’s how it works when you introduce a debt consolidation loan into the picture.
- You take out a new debt consolidation loan for the full amount of your debt, $73,000.
- You pay off your entire credit balance for each of the three credit cards: $1,000 to American Express, $1000 to Visa, and $1,000 to MasterCard.
- You pay off your entire student loan: $55,000.
- You pay off your entire private loan: $15,000.
Note: The example above is for illustrative purposes only and is not meant as financial advice or instructions. You are encouraged to speak with a professional financial advisor to help determine the best solution for your specific debt needs.
Now, you're debt-free, right? Sort of. You have no more outstanding debt. The only thing you have to pay off now is your debt consolidation loan. So, instead of having to make five individual payments each month, you've shrunk your debt repayment requirements down to a single monthly payment. That is helpful in two ways:
- You only have to pay off a single debtor, so your monthly payments can end up being significantly less than if you had to keep five individual lenders happy.
- You alleviate the headache of having to juggle five different payments with five different amounts, payment schedules, due dates, fees, and more. One payment is much more manageable mentally than five.
What’s more (and often most important), you could end up paying less all around because you have lowered your interest rate.
Choosing the Best Debt Consolidation Loan Company: Factors to Consider
Factor in details about a debt consolidation loan provider, such as:
- Is offering a lower interest rate (and APR);
One of the most important features is the APR. With a lower interest rate, you can end up saving considerably on your debt consolidation loan. With a higher one, you’re shooting yourself in the one good foot you have to stand on.
- Has experts to talk to;
Most of us don't know very much about finances and how these things work. For that reason, it can be advantageous if you find a debt consolidation loan lender that will walk you through the whole process, answer any questions you have, explain all the terms, and be clear with you about any details that are murky.
- Is flexible;
Repayment terms, prepayment penalties, late payment fees, and more will vary from one lender to the next. Find a lender with flexible terms that you can work with for the most pleasant borrowing experience.
When to Consider a Debt Consolidation Loan
A debt consolidation loan could be the right idea if you:
- Are struggling with multiple types of debt
- Want to increase your credit utilization ratio
- Want to build your credit by diversifying
Of course, it is also worth noting when it's NOT a good idea to take a debt consolidation loan. If you are currently in major credit card debt due to irresponsible spending and you don't intend to change these habits, walk away. While a debt consolidation loan can help alleviate your debt, it will only work if you have every intention of taking a more responsible course of action in the future. Clearing your debt quickly leaves a tempting void on your credit line, freeing up that line to more spending. If you aren't careful, you could easily find yourself in even greater credit card debt than before you started.
Disclaimers
Upstart
* If you accept your loan by 5 pm EST (not including weekends or holidays), loan funds will be sent to your designated bank account on the next business day, provided that such funds are not being used to directly pay off credit cards. Loans used to fund education-related expenses are subject to a 3 business day wait period between loan acceptance and funding in accordance with federal law.
OneMain Financial
* Example Loan: If you borrowed $6,000 with a 24.99% APR and 60-month term, your payments would be $176.07 per month. This example is based on an average customer with good credit. Terms & Conditions: Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on your ability to meet our credit standards (including a responsible credit history, sufficient income after monthly expenses, and availability of collateral). Larger loan amounts require a first lien on a motor vehicle no more than ten years old, that meets our value requirements, titled in your name with valid insurance. Maximum annual percentage rate (APR) is 35.99%, subject to state restrictions. APRs are generally higher on loans not secured by a vehicle. Depending on the state where you open your loan, the origination fee may be either a flat amount or a percentage of your loan amount. Flat fee amounts vary by state, ranging from $25 to $400. Percentage-based fees vary by state ranging from 1% to 10% of your loan amount subject to certain state limits on the fee amount. Active duty military, their spouse or dependents covered under the Military Lending Act may not pledge any vehicle as collateral for a loan. OneMain loan proceeds cannot be used for postsecondary educational expenses as defined by the CFPB’s Regulation Z, such as college, university or vocational expenses; for any business or commercial purpose; to purchase securities; or for gambling or illegal purposes. Borrowers in these states are subject to these minimum loan sizes: Alabama: $2,100. California: $3,000. Georgia: Unless you are a present customer, $3,100 minimum loan amount. Ohio: $2,000. Virginia: $2,600. Borrowers (other than present customers) in these states are subject to these maximum unsecured loan sizes: Iowa: $8,500. Maine: $7,000. Mississippi: $7,500. North Carolina: $7,500. New York: $20,000. West Virginia: $14,000. An unsecured loan is a loan which does not require you to provide collateral (such as a motor vehicle) to the lender.
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Close with a better rate than you prequalify for on Credible and get a $200 gift card. Terms Apply.
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