Many individuals and families have several types of loans, such as credit cards, mortgages, auto, and student loans. If you don’t closely monitor your monthly payments and balances, you may miss a payment and incur penalties and additional interest. Consolidating your loans into a single one with a lower interest rate can save you money and provide peace of mind. This article discusses types of loan consolidation and the best debt management companies to consider.
Types of loan consolidation
By consolidating a loan, you take a new secured or personal loan or a new credit card to pay off all your smaller debts. When you consolidate multiple debts into one, you only have to pay one lender instead of several. This can lead to a lower interest rate and simpler management of your debt payments. It makes budgeting easier, as you don’t have to set money away to pay multiple debts. The different options for debt consolidation are:
Debt management plan
A debt management plan is a loan repayment schedule you create with a credit counselor after reviewing your credit, budget, and payment options. After agreeing on a plan, the credit counselor will contact your creditors to renegotiate the terms of your loan. They can increase the loan term, decrease the interest or loan amount, and reduce the interest rates and monthly payments. You then make a monthly payment to a credit counselor who pays your lenders per the debt management plan.
Student loans
If you have student loans, you can consolidate your loans through the Federal Direct Loan program.
Personal loan
You can take an unsecured loan from your bank or a credit union to repay all your smaller loans. You can repay the loan through regular monthly payments within the accepted duration at a fixed rate.
Credit card
You can take a new credit card and transfer all your existing credit card balances to it. Most credit card companies offer promotional periods where you pay 0% APR for six or more months, after which the company charges you a specific interest rate. You should use this offer and pay off your debt within the 0% interest period. You may have to pay a fee of about 3% or 5% as a fee for the credit card balance you transfer.
Home equity loan
Homeowners can avail of a home equity loan, get a line of credit, and pay off all their current loans. These loans are secured and carry lower interest rates than unsecured loans. Tax deductions can be claimed for home equity loan interest.
The different charges for loan consolidation
Consolidation of a loan has multiple associated costs and fees. If you use a credit card for this purpose, they charge a 3% to 5% fee for the balance transfer amount. If you use a debt consolidation loan company, you would be paying a service fee plus charges for paperwork. The service may be between 1% to 8% of the loan amount, and they deduct the charges from the loan proceeds. If you are looking for debt counseling at an affordable fee, you can look for nonprofit debt counselors who work with you for free or charge a very nominal fee to cover expenses. The cap on debt management plan fees is $79 across the country.
Interest rates for loan consolidation
The interest rates for debt consolidation depend heavily on your debt-to-income ratio, and your credit score keeps varying.
The current interest rate for debt consolidation for people with excellent credit scores could be around 11.3%. For good scores, it’s around 15.6%, and for fair scores, it’s around 22.3%. In most cases, those with poor credit scores may not be eligible for debt consolidation.
Best options for loan consolidation
Before choosing a debt consolidation loan company, it’s important to verify its financial stability, length of operation, and overall reputation. Research online about customer experiences and thoroughly search for any lawsuits for fraudulent practices. Similarly, if you want to consolidate your loan through a credit card, compare rates and APRs online and choose a company that charges you lower interest and offers a maximum 0 APR duration. Here are some recommendations for the best options for loan consolidation:
Best debt management companies
Century Support Services
American Consumer Credit Counseling
Money Management International
Credit.org
Best balance transfer credit cards with 0% APR
Bank of America
Discover it Balance Transfer Card
Citi Simplicity Card
Wells Fargo Reflect Card
Best debt consolidation loans
Achieve
Discover
Upgrade
Universal Credit
Risk of debt consolidation
Your credit score could be affected in the short term once you consolidate your loan. It can improve over time if you use the consolidation correctly and make timely payments. However, if you do not stop using your credit cards or take more debt, you could pay more by loan consolidation. Hence once you consolidate your loan, it is important to be prudent about making the monthly payments.