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.
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.
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.
Compare the Best Student Loan Refinance Rates
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.