You can consolidate high-interest credit card debt in multiple ways, including home equity products (if you own a home), balance transfer credit cards, and personal loans.
Here are four reasons why you might consider a debt consolidation loan to tackle your high-interest debts.
If you want to consolidate debt, Credible makes it easy to see your prequalified personal loan rates from various lenders, all in one place.
- What is debt consolidation?
- Reduce the overall cost of your debt
- Refinance your debt without risking your home or other assets
- Lower your monthly payments
- Simplify your debt
Before we dive into the reasons why a debt consolidation loan makes sense, let’s define what it is. Debt consolidation rolls several debts into a single account with one easy-to-manage payment. It’s a strategy you can use to simplify the debt-payoff process and potentially save some money on interest. If you’re overwhelmed with debt, then debt consolidation may be a smart move.
While you can consolidate debt in several ways, a debt consolidation personal loan is one of the most popular. With a debt consolidation loan, you take out a new loan to pay off one or more unsecured debts you already have. It gives you one manageable monthly payment so you don’t have to worry about juggling multiple debts, interest rates, and payment due dates.
It’s important to understand that while a debt consolidation loan can treat the symptoms of your financial problems, it won’t treat the cause. Think of it as a tool to give you some breathing room so you can get back on your feet and design a long-term plan for a better financial future.
A personal loan can help lower your debt cost in two ways. If you’re able to lock in a lower interest rate than the rates you currently have on all your debts, you can save hundreds or even thousands of dollars in interest.
Plus, a personal loan gives you a clear end date for when your debt will be paid off. This can help you stay focused on your goals and pay off your debt sooner.
Visit Credible to compare personal loan rates from various lenders, without affecting your credit.
While home equity products — like home equity loans and home equity lines of credit (HELOCs) — may come with lower interest rates than personal loans, they have some drawbacks you should consider:
- Deplete your home equity — Since a home equity loan draws on the value you’ve built up in your house, you may end up underwater on your mortgage and owe more than your property is worth if home values drop. This could be a serious issue if you have plans to move soon.
- Put your home at risk — A home equity loan puts your home up as collateral. If you fail to make your payments, you could lose your home through the process of foreclosure.
- May not qualify — Most lenders won’t give you a home equity loan or HELOC unless you have some equity in your home. Your equity is the difference between what you owe on your mortgage and what your home is currently worth. While every lender has its own criteria, most will look for at least 15% equity.
A debt consolidation loan, on the other hand, doesn’t require any collateral, meaning you won’t have to put your house, car, or other assets on the line. You may also lock in a lower interest rate than you’d be able to with a credit card.
Your rate will likely be fixed instead of variable (like it would be with many HELOCs), so you can budget for your payments in advance. And if you have good or excellent credit, it can be easier to qualify for a debt consolidation loan than a home equity product.
If you have a lot of high-interest credit card debt and take out a personal loan with a lower interest rate, you may be able to reduce your monthly payment amount. This can free up your cash flow and give you more money to put toward your emergency fund and other financial goals, like saving for a house or retirement.
Choosing a personal loan with a longer term can also lead to lower monthly payments. But keep in mind that if you go this route, you’ll pay more in interest over time.
When you’re juggling multiple loans and credit cards, it’s easy to miss a bill payment. Missing just one payment can take a toll on your credit.
A debt consolidation loan lets you roll multiple monthly payments into a single loan with one fixed interest rate. This can make the debt payoff process much more manageable and reduce your risk of missed payments. Many personal loan lenders also offer discounts for setting up automatic payments, which will ensure your monthly loan payments will be made on time.
If you’re ready to apply for a debt consolidation loan, Credible lets you quickly and easily compare personal loan rates to find one that best suits your needs.