If you find yourself overwhelmed with debt, consolidation could help you restructure your finances and pay your debts in one monthly payment. It’s easy to rack up debt over the years, and old charges with long-term repayment periods pile high with interest that makes them nearly impossible to get out of. You may eventually get some new loans or credit to repay what you owe, but then you have even more to pay back than you did originally. Debt can become a vicious cycle that leaves you frustrated and even depressed.
There are plenty of ways to consolidate debt, and a personal loan is one of them. A lot of factors will determine which type of debt consolidation is right for you. These factors can include your overall debt, the type of debt, your monthly income, your credit score and your level of self-discipline.
Let’s take a look at the basics of debt consolidation to determine whether it’s the right choice for you. We’ll also try and figure out how a personal loan can help you repay credit debt that’s gotten out of hand.
What Is Debt Consolidation?
When you consolidate debt, you combine all of your outstanding repayments into one single, hopefully, smaller one. Typically, people consolidate their debt by taking out a loan to pay off another, such as credit debt.
Some people find themselves trapped by the increasing amount of bills due every month. Many of life’s major milestones leave us with debt: Earning a degree leaves people with thousands of dollars in student debt, credit cards to cover basic living expenses can quickly cost more than they’re worth, and repaying your car can cost you far more than you ever anticipated.
How do you go about consolidating all of these payments into one lump sum? It starts by thoroughly looking at your current financial status and repayment options. Some people get scammed by the idea of fantastic debt relief programs and debt consolidation loans that promise to help them live debt-free with little interest in a matter of a few years. The problem here is that people wind up paying off their debt with one massive loan that quickly amasses interest and becomes even harder to pay off than all the old monthly payments.
Consolidation is a great avenue for many people, but before you rush to apply for a loan and rid yourself of debt, look at some of the steps and decide whether consolidating your payments is the best decision.
Is Debt Consolidation Right for Me?
Two primary factors will influence whether you should consolidate debt:
- Your financial status
- The type of debt you owe
Many people are stuck debating whether debt consolidation is a good idea. While it’s easy to think that taking out a loan to consolidate debt is the perfect solution, it varies by individual. The type of debt you have plays a huge factor in loan approval, and your financial situation will influence whether you’re capable of even paying a lender back. Taking out a loan to pay off debts isn’t a smart move unless you’re in a position to stay on top of your new monthly payment and avoid falling into further debt.
Credit card debt is just one of the reasons people may want to seek out consolidation options. Medical bills, student loans, mortgages and auto loans are other popular reasons people look to a personal loan for help.
A U.S. News & World Report survey revealed that most people who take out debt consolidation loans do so to pay for between $5,001 and $10,000 worth of debt. This is a relatively small amount of money compared to how much debt many people have, so it makes sense to consolidate multiple payments into one.
Secured vs. Unsecured Debt
Debt management companies divide debt into two basic categories: secured and unsecured. Secured debt is tied to something that can be used as collateral, such as your house or car. A mortgage is an example of secured debt. In exchange for the loan you borrowed, you got a house. If you fail to repay your mortgage, you lose the house.
Unsecured debt, on the other hand, does not have anything used as collateral. Many credit cards are unsecured, meaning that if you fail to repay the line of credit you’ve taken out, you won’t lose your house or car, but the credit company can come after you. Credit debt is often met with such high-interest rates due to the fact that it’s unsecured.
Companies lose a lot of money when people don’t pay them back, so interest rates and fees are compiled to make up for the funds they’re losing. Of course, this ultimately doesn’t help either party since people who can’t repay their credit debt only fall deeper into the hole with compounded interest and late fees.
Ask If a Loan Makes Financial Sense for You
If someone is facing thousands of dollars a month in costly payments, it may be better to speak to each lender and ask for a thorough explanation of the debt as well as any loan forgiveness and financing options that are available.
You don’t want to take out a personal loan to consolidate debt if the new payment will not exceed your current debt. This includes factoring in the annual percentage rate, the rate you’re charged each year for borrowing money.
The maximum APR rates for a personal debt consolidation loan online top out at 36 percent. Your initial down payment may be small, but if your calculations show that you’ll be charged hundreds or even thousands of dollars a year in additional fees, you might want to consider other options for repaying your debt quickly.
There are many debt management programs out there that help people who have bad credit or who are in poor financial standing slowly work their way out of debt and reclaim financial freedom.
Debt Consolidation Loans
If you decide to borrow a loan to consolidate debt, don’t rush and make a hasty choice that comes back to haunt you. American Business Credit, your bank and a certified credit union are your best options when it comes to consolidation loans.
American Business Credit is a quick and convenient option to get the financing you need. Our goal is to make the whole process as pain-free as possible. Once you apply you will quickly receive offers for short term or long term personal loans from our vast network of quality lenders.
A credit union typically has flexible options for people with varying amounts of credit debt and other bills. Those with bad credit scores can also find some assistance with plans that have APRs averaging 18 percent.
Credit unions are in the business of finance but also customer service. Unlike banks, credit unions are customer-owned and tend to be more personalized. People who meet the membership criteria for a credit union can gain access to the help and resources they need to get out of debt.
Joining a credit union typically involves playing a small enrollment fee that ranges from $5 to $25. Employers, labor unions, churches, and certain geographic areas have their own credit unions you can look to join.
How to Get a Personal Loan to Consolidate Debt
Visiting your bank or a credit union can help you find a debt consolidation loan that’s flexible and more accessible than private loans, especially if you have bad credit.
In order to get a personal loan to consolidate debt, you’ll have to find a reputable lender, such as American Business Credit, who can offer you an affordable, long-term loan with a fixed repayment plan and interest rate that won’t become too much over time.
Your credit score will play a large role in the type of personal loan you’re offered as well as how much money you can borrow. Credit is rated on a scale ranging from 300 to 850. Typically, personal credit scores can be broken down into the following categories:
- Excellent: 750+
- Good: 700-749
- Fair: 650-699
- Poor: 600-649
- Bad: Below 600
Most personal loan lenders will require a borrower to have fair to good credit with a minimum score of 640. You will also have to provide a verifiable proof of income like pay slips, pay stubs or bank statements showing direct deposit from your employer.
The lowest APR and interest rates are given to those with the highest credit as they are the individuals who a lender sees as most likely to pay back their loan without costing them additional money.
Pros of a Personal Loan to Consolidate Debt
- There are a fixed interest rate and monthly payment.
- People experience less stress worrying about how to cover multiple payments with their own timelines and interest rates.
- They can be easy to obtain and quickly repay lots of outstanding debt.
- There is a reduced risk of defaulting or falling behind on payments.
- These loans can be difficult to get without a good credit score or positive financial standing.
- Longer repayment terms could gather more interest than original debt over time.
- Poor credit might give you less money or a higher monthly payment and higher interest.
- Some personal loans have origination fees that cost hundreds of dollars upfront.
Can a Credit Counselor Help?
Credit counselors work for nonprofit organizations and help people analyze their debt and find possible solutions. The National Foundation for Credit Counseling is the longest-running credit nonprofit in America. You can find credit and debt counseling services for affordable prices that will match you with a personal credit counselor capable of helping you make the most responsible decision for your future.
Debt management companies, unlike credit counseling organizations, are for profit. These businesses charge fees for their services and will do the “heavy lifting” for you by representing you to creditors and credit collectors to help repay and consolidate debt.
The most important thing to do before you take out a personal loan is to meet with an accredited credit counselor or debt management specialist who can help you make the best decision. Learning about repayment options, financing options, and even the best lenders to borrow personal loans can help you get your way out of debt and back into good standing.
Remember that no one repairs their credit overnight. Past mistakes don’t define your present, and even if you are facing a few years of hefty repayments, you can slowly make better financial choices and regain control over your bank account. One day, bills won’t be unmanageable and insurmountable. You may find that a personal loan is an answer you’ve been looking for to get some room to breathe and focus on just paying off one big sum instead of many small ones.
You should also keep in mind there are other ways to consolidate debt; a personal loan is just one of the options you have to consider.
Chris Fuller went to the University of South Florida and has worked in the financial sector for over 20 years. He has extensive experience in all aspects of personal and small business lending, from personal loans, equipment finance to cash flow based solutions for small mom and pop businesses, and large corporations.