Debt consolidation involves obtaining a new loan to settle multiple debts, commonly including credit card debt, student loans, medical bills, and high-interest personal loans.
By consolidating, you can potentially decrease the total repayment expenses by securing improved terms and interest rates. Additionally, managing a single payment simplifies tracking compared to juggling multiple payments.
You can consolidate credit card debt
Nevertheless, individuals grappling with multiple high-interest credit cards and those struggling to meet their monthly payment obligations may find debt consolidation advantageous.
Streamlining credit card debt through consolidation not only simplifies the repayment journey but also holds the potential to yield substantial interest savings. Personal loans, on average, carry interest rates around 12.20 percent, contrasting sharply with the soaring average credit card interest rates, nearing 21 percent, exacerbated by high inflation and historic interest rate hikes.
Given these circumstances, borrowers with sound credit standings should seriously consider consolidating their debts, especially if they qualify for a lower interest rate through a personal loan.
Financial benefits
When initiating consolidation efforts, prioritizing the repayment of the most costly debts is prudent. This often includes tackling credit card balances first, primarily due to their high interest rates. Opting for a debt consolidation loan with a lower interest rate than your existing debts can result in substantial savings, stemming from the reduced rates.
Cost savings
Employing a low-interest personal loan to settle expensive credit card debt holds the promise of significant savings. For instance, if you have an annual percentage rate (APR) of 16.00 percent on your credit card and consolidate $10,000 in debt with a new 24-month personal loan at a rate of 7.50 percent, you could potentially:
- Save nearly $1,100 in interest charges.
- Lower your monthly payment by nearly $50
Faster payoff
Securing a low-interest personal loan could enable you to clear your debt in a considerably shorter timeframe.
Credit benefits
Your credit utilization ratio, which accounts for 30% of your FICO Score, is determined by the amount of available credit you’re using. Utilizing a large portion of your available credit can hinder approval for other types of debt and potentially lower your score.
While a consolidation loan would retain the debt owed on your credit report, installment loans like personal loans typically have less impact on your credit score compared to credit cards. By consolidating debt and consistently making monthly payments, you can swiftly boost your score by reducing your utilization levels.
Another option is using a balance transfer credit card to settle outstanding credit card debt. If you have good credit, you might qualify for a balance transfer offer featuring a low or 0% interest rate for a duration of six, 12, or even up to 24 months.
However, since the new balance transfer card remains a revolving account, the credit score benefit might not be as substantial as with a personal loan. Moreover, failing to pay off the balance by the offer period’s end could leave you burdened with additional high-interest debt in the future.
You can consolidate student loans
However, opting to consolidate your student debt isn’t a one-size-fits-all solution. In certain scenarios, it can result in more harm than benefit.
While both federal and private loans can be consolidated, it’s crucial to handle federal loans differently. Consolidating federal student loans through the Department of Education is advisable. If consolidated with a private lender, borrowers forfeit all benefits and protections associated with federal student loans. These encompass income-driven repayment plans and access to forgiveness programs.
Student loan consolidation might be suitable if:
- You hold high-interest private student loan debt.
- Your new loan, whether federal or private, offers a significantly lower APR than your current student loan debt.
Financial benefits
Over time, the accrued interest on student loans can become significant, but consolidation can provide the financial relief you seek.
Lower interest rate
Consolidating your student loans could potentially lead to securing a lower interest rate. The greater the sum owed in student loans, the higher the potential savings by consolidating into a new loan with a reduced interest rate.
Credit benefits
Credit scoring models take into account the number of accounts with balances on your credit report, known as your credit mix, which constitutes 10 percent of your FICO score. Although not the most significant scoring factor, it’s still important to monitor the number of open accounts.
Reducing the number of outstanding accounts is likely to result in an improvement in your credit score. While this factor alone may not lead to a significant jump in your score, you can expect an increase of at least a few points.
Consolidating your student debt can also safeguard your credit report in the long run if you miss a monthly payment and it transitions to delinquent status. Even though you make a single payment to your lender, you’re effectively repaying all your loans on the consolidation plan. However, any delinquent payments will be recorded on your credit report for each active student loan and will persist for seven years.
When you consolidate, you have only one loan, so only one account would reflect a delinquent payment report. While a single late payment is still unfavorable for your credit score, it’s less detrimental to your credit health than having past-due payments on multiple accounts.
You can consolidate medical debt
Data from the Peterson-KFF Health System Tracker reveals that nearly one in ten U.S. adults grapple with some type of medical debt. While medical debt typically doesn’t accumulate interest, neglecting it could adversely affect your credit.
Financial benefits
If you’re contending with substantial medical bills that have lingered without resolution and are unable to negotiate a payment plan with your medical provider, consolidation could serve as a viable solution to settle that debt.
Make repayment more manageable
Consolidating medical debt can be approached through various methods, with 0 percent interest credit cards and personal loans emerging as two prevalent options.
Consolidation can alleviate the burden of repaying high medical bills by merging multiple accounts into a single monthly payment.
However, it’s important to note that consolidating medical debt typically entails accruing interest, especially if opting for a personal loan. Despite this drawback, if these outstanding bills have lingered unresolved, consolidation might be a worthwhile consideration.
Credit benefits
Medical debt itself typically isn’t reported to credit bureaus. However, if your medical provider resorts to sending the account to collections, it may eventually find its way onto your credit report. It’s important to understand that this situation typically arises for balances exceeding $500 and remaining unpaid for a year or more following your medical appointment.
Consolidating high medical bills presents an opportunity to sidestep the potential negative repercussions on your credit report stemming from accounts being sent to collections.
You can consolidate personal loans
If you aim to streamline your financial management or expedite your debt repayment journey, consolidating high-interest personal loans could be a prudent move. This holds particularly true if your credit score and income have seen improvements since initially acquiring those loans.
Financial benefits
Personal loan interest rates are most favorable for individuals with good or excellent credit. Conversely, if your credit score is lower, you can expect to receive a higher rate, resulting in an increased monthly payment.
Save on interest
If you’ve previously borrowed personal loans, you could potentially reduce interest expenses by obtaining a new loan with a lower APR. Consolidation is advisable only if you’re presented with a lower interest rate. Therefore, it’s prudent to prequalify with numerous lenders before proceeding with an official application.
Numerous lenders provide prequalification, enabling borrowers to assess their eligibility prospects and estimated rates without undergoing a hard credit inquiry. It’s advisable to avoid applying to multiple lenders that lack prequalification unless you’re confident in securing a lower rate. Otherwise, you risk multiple hard-credit inquiries and potential rejections.
Credit benefits
Consolidating personal loans into a new personal loan doesn’t affect your credit utilization rate since personal loans are installment accounts, not revolving ones. While reducing the number of accounts might slightly benefit your scores, the credit inquiry and the addition of a new account to your report could counteract any potential score increase.
Nevertheless, if consolidating your personal loans into a more affordable installment option can save you money, it’s likely a sensible choice. Even if your credit scores experience a slight decline due to the new inquiry and loan, they can recover over time as the account matures and you handle it responsibly.
In Conclusion
Consolidating credit card, student loan, and high-interest personal loan debt can lower your interest rates and render your monthly payments more manageable. Additionally, consolidating lingering medical debts can prevent them from being sent to collections, safeguarding your credit.
This consolidation process simplifies repayment, facilitating the management of outstanding debt obligations while potentially enhancing your credit and overall financial well-being.
Before initiating a loan application, it’s crucial to familiarize yourself with the consolidation process and identify which debts are eligible for consolidation. Furthermore, assess your budget and spending patterns to ensure that consolidation won’t lead to overspending and exacerbate your debt burden.