Debt Consolidation can be a great way to get your finances under control.
One of the benefits of debt consolidation is that you simplify the process of becoming debt free. You only have to pay one loan instead of several loans that you have to pay every month. And you don’t have to decide which of your debts to focus on first, as you only have to worry about this one loan.
If you make a smart choice for debt consolidation, there’s actually an even bigger benefit: saving money on the interest you pay on your debt.
But whether your consolidation loan will save you money — or cost you money — depends on answering one big question: What type of debt consolidation will you use?
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Which Type of Debt Consolidation Is Right for You?
Before consolidating debt, research your options and choose the right type of debt consolidation.
The Ascent’s selection of the best personal loans
Looking for a personal loan but don’t know where to start? The selection of the best personal loans from Ascent will help you demystify the offers out there so that you can choose the best one for your needs.
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There are a number of loans that are specifically marketed as “debt consolidation loans” to people who owe a lot of money. They are often expensive and do not have favorable conditions. But there are also a number of potentially good options, including:
Let’s take a look at the pros and cons of some of these options.
- Personal loans are easy to apply for, quickly approved, and have a lower interest rate than many credit cards. But they have higher interest rates than the starting rate for a balance transfer or the rate you would pay for a home equity loan.
- Balance transfers are good to consolidate credit card debt. That’s because you’re moving the debt from your existing cards to a new one balance transfer card. They can work well if you qualify for a balance transfer card with a 0% promotional interest rate. The downside is that your 0% rate is only good for a short time – often around 12 months. So you can immediately end up again after the initial offer period where you start with high interest costs.
- Equity loans are an option for homeowners who have a lot of equity in their home. The upfront cost of approving a loan can be very high, although the interest rates are usually very low. The big downside is that you put your home at risk by using it as collateral. You could also be flooded (owing more than your house is worth).
Researching each of these loan options is crucial to ensure that consolidation is a smart move. After all, you don’t want to take out a loan to get your debt under control and then regret it because it costs you more or makes it impossible to sell your home when necessary.
Other Important Considerations About Your Debt Consolidation
The method of debt consolidation is not all that matters. The specific conditions also affect whether debt consolidation is a good idea.
First and foremost, make sure you get a lower interest rate than the debt you are consolidating. Otherwise, you will end up paying higher borrowing costs, which is not logical.
You should also consider the payout timeline. If you lower your interest rate by taking out a home equity loan, but it takes you 30 years to pay off your debt when you would have paid it off in two years if you kept the status quo, then you are in in a worse position .
The same applies if you get a personal loan with a much longer repayment term, or if you cannot pay off the transfer before the 0% rate expires. You can get stuck with a large balance at a higher rate than you previously paid.
The Ascent’s Picks for the Best Debt Consolidation Loans
Pay off debt faster? Check out our shortlist of the best personal loans for debt consolidation and cut your monthly payment at a lower rate.
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By carefully considering how you are consolidating debt, as well as its terms, you can avoid unwanted results and ensure that your consolidation makes sense. Take the time to research your options carefully and do the math before proceeding so you don’t regret it.