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Debt is a tricky problem to solve, as so many factors go into a person’s ability to clear their name from the burden of loans and a bad credit score. Financial mismanagement is a real problem, especially amid trying times. Many Americans have multiple debts from credit cards and loans, which can be hard to keep in order. In 2018, debt consolidation loans were the most requested loan type, with an average balance of over $12,500 per account. Here’s everything you need to know about debt consolidation services and how they can help you.
Did You Know?
In the US, the average credit card debt is over $5,300. Personal loans average a little over $16,000, and HELOCs are even higher at over $40,000. In connection, Americans own an average of 4 credit cards each—that equates to over $20,000 in consumer debt alone.
With rising home prices, talks of inflation over the horizon, and interest rates that compound too often to keep up with, it’s rightfully difficult to get out of a spiral of debt. There are countless factors that contribute to a person’s inability to make repayments—but the most mind-boggling of all is that 35% of Americans say they simply forget to do so.
Financial mismanagement, whether intentional or not, is a massive issue that’s causing many to bury themselves deeper into repayments. It’s the main problem that debt consolidation solves.
What is Debt Consolidation and How Does it Work?
Debt consolidation allows you to transfer all existing qualifying loans to a single low-interest loan, easing the stress of repayments. Think of it as taking on another loan to pay for your existing loans while significantly reducing the interest rate. Your total repayment balance will essentially still be the same—but it will become a lot easier to pay back.
The biggest advantage of debt consolidation is the possibility of lowering your interest rate, but keep in mind that this benefit doesn’t always apply. You still need to shop around for an institution that can offer you a program that will result in savings. Your loan tenure may also increase to account for the lower interest, but with the benefit of only having to worry about one loan instead of five different credit cards with different monthly due dates.
Getting a debt consolidation loan is an amazing way to get rid of high-interest commitments, so you can focus on repaying your loans as fast as possible. Banks and other financial institutions offer debt consolidation programs, so it isn’t something that borrowers typically do without first consulting with an advisor.
Who Can Get A Debt Consolidation Loan?
Anyone with a qualifying loan can get a debt consolidation loan if they meet the criteria, which varies among lenders. In general, most lenders and debt settlement companies accept credit card loans, unsecured loans, and medical debt. If you’re holding a massive amount of student loan debt that you want to consolidate to a lower-interest option, it’s recommended that you reach out to institutions to understand if they can meet your needs.
Your credit score also plays a huge role in your eligibility for debt consolidation. Generally, most institutions can help you even if your score is well under the 600 range—but don’t expect them to offer a significantly lower interest rate. The higher your score, the better the deal you can get. Your chances are much better when your credit score is between 600-700.
Before deciding whether or not to move forward with debt consolidation, check your credit card balances and other loans, calculate your monthly repayments, and cross-check against the lender’s offer. Remember—the goal is to get the lowest interest possible with a repayment plan that you can afford.
Types of Debt Consolidation Loans
Lenders offer various debt consolidation loans depending on your needs—here’s how they differ.
Home Equity Loans for Debt Consolidation
This debt consolidation strategy involves taking out a secured loan and offering your home equity as collateral. Home equity refers to the remaining balance on your mortgage, so you’re essentially surrendering part of your house to the lender by going through this path. If you fail to repay, the bank may gain the authority to foreclose on your home to cover the missing payments.
While this strategy is risky, secured loans are a lot easier to obtain. If you’re confident about making the repayments, taking a home equity loan could be a viable option.
Personal Loans for Debt Consolidation
Personal loans are less risky, high-value loan options for debt consolidation. Many banks offer personal loans at a fixed rate—including those specifically for easing your financial situation. In addition, these are unsecured debts, which means that you don’t have to offer collateral to qualify.
You may find that some lenders charge an origination fee of up to 1%, which is the administrative cost for processing the loan. Take this into consideration when choosing a personal loan—or opt for one without the extra fee.
Balance Transfer Credit Cards
If you’re swimming in credit card debt, getting a balance transfer is a no-brainer solution that many banks offer. A balance transfer essentially merges all of your existing debt into one credit card, which will have an extra-low interest rate for a limited period (usually one year).
This benefit allows you to take major leaps in making your repayments so that you can clear—or almost completely clear—your debt by the time the low-interest period ends. Combining all credit card balances into one also makes it easier to plan your monthly payments.
HELOC for Debt Consolidation
HELOC is short for home equity line of credit, a debt consolidation method growing in popularity. It’s very similar to the home equity loan but with a catch. Rather than getting a few years to pay, HELOCs often run for a decade or longer, giving you a larger pool of funds and longer repayment opportunities.
A HELOC normally consists of part of your home’s value (up to 80%) minus the remaining balance on your mortgage. The interest rate is almost always lower than credit cards.
401k Withdrawal for Debt Consolidation
Your 401k balance is dependent on how much you have contributed to it, so if there’s hardly anything in the account, this option may not be worthwhile. If you have a large enough balance to give this option a try, consider these factors:
- If you’re 59.5 years old and under, all withdrawals come with a 10% fee and will be charged income tax.
- If you’re over 59.5 years old, all withdrawals are free but will be charged income tax.
- The only way to dodge income tax is to be over 59.5 years old and withdraw from a Roth 401k account.
Debt Consolidation Loans
Some banks specifically offer debt consolidation loans, which are similar to debt settlement programs in that they help you make repayments as comfortably as possible. These often come with a lower interest rate that remains fixed throughout its lifetime, so you can be reassured that the monthly payments won’t increase over time.
How to Choose the Best Debt Consolidation Loan for Your Needs?
There are so many ways you can consolidate debt and control your finances. Here are some things to consider to help you filter through your choices.
1. Determine What Kind of Loan You Have
Some debt consolidation loans only cater to specific loan types. For example, student consolidation is limited to student loans; balance transfers are limited to credit cards. Figure out your overarching debt situation and start from there. If you have various loans from different categories, it may be inevitable to do more than one consolidation.
2. Determine Your Repayment Capacity
Understanding your financial situation is incredibly important, as it prevents you from opting for a consolidation plan that you can’t afford. While some debt settlement companies may try to woo you with promises of being debt-free in one year, remember that success ultimately depends on your repayment power. For example, if you make $40,000 a year, it’s realistically not possible to pay off $60,000 without help.
Feel free to use our free debt calculators when determining your capacity to repay:
3. Choose the Lowest Interest
There’s hardly any point in going through the trouble of consolidating all your debt into a loan with a higher interest rate. The point of debt consolidation is to find a way to get you back on track and out of hot water—so choose a program that can help. Start by calculating your existing debt and interest, then build your debt management plan. Next, determine your ideal interest rate and shop around for a lender with that information in mind.
4. Choose a Realistic Plan
Some debt consolidation loans are riskier than others. For example, a home equity loan can help you clear your debt fast but fail to make a repayment, and you may end up homeless. Likewise, a 401k withdrawal might sound tempting, but if you’re nearing retirement, choosing this option will drain you of savings.
So be careful about picking a debt consolidation strategy and opt for one that works with your present and projected future financial situation.
How to Get a Debt Consolidation Loan?
Getting a debt consolidation loan is a lot easier than it sounds. Follow these steps to guide you along the process.
1. Assess your finances
Check your credit score, credit history, all the loans you have, your income, and overall money situation. This will help you figure out what you need and what kind of lender to approach.
2. Choose a debt consolidation service
A lot of lenders offer debt consolidation, but not all of them can offer you a service that works for your finances. Based on the information you gathered from step 1, shop around for a lender that matches your needs.
3. Apply for debt consolidation
It’s as simple as heading over to Prudent Financial Solutions to fill in an application or call Prudent at 1 877-612-3246.
Don’t forget that getting the loan is only one step of the process. After your application is accepted, mark your calendar and make those repayments on time!
What to Do Before You Apply for Debt Consolidation?
Before applying for debt consolidation, prepare all the documents you need to make the process as easy as possible. Consider doing the following before applying:
- Check your credit score and find out whether it’s within a safe range for debt consolidation (600-700). If not, your chances of getting accepted will be a lot lower.
- Review your finances and determine the maximum repayment you can afford per month. Try calculating all your interest and debt with a debt calculator to find out an interest rate to aim for.
- Obtain your credit report from the Federal Trade Commission and check it for inconsistencies. Mistakes are common among these reports, so scrutinize them and get in touch with a credit bureau to amend errors.
- Get in touch with the debt consolidation company and find out their other application requirements.
FAQs About Debt Consolidation
Is Consolidating Your Debt a Good Idea?
Consolidating debt is a great idea if you’re struggling to juggle multiple loans and need a debt management system to get you back on track.
Does Consolidating Debt Affect Credit Score?
Getting a debt consolidation loan will cause your credit score to go down, but this is normal and occurs when taking on any kind of loan. When you consistently make repayments, your credit score will increase, but failing to make the monthly minimums will make your score plummet further.
What is the Best Interest Rate for Debt Consolidation?
It’s recommended to opt for interest rates between 5-10% or even lower, as these values fall under the usual personal loan or credit card rate.
What is the Most Reliable Debt Consolidation Service?
Prudent Financial Solutions is a veteran in the financial services sphere, offering consumer-focused debt consolidation plans for various loans and budgets.
Where to Get Debt Consolidation Near Me?
At Prudent Financial Solutions, we believe that getting a debt consolidation loan is a big but worthwhile step in any financial journey, as long as you’re ready to commit to the monthly payments.
If you’re interested in learning more about debt consolidation services, managing your money, and other financial offers, don’t hesitate to contact us at 1 877-612-3246.
We offer debt consolidation in the following service areas:
- Debt consolidation in California
- Debt consolidation in Colorado
- Debt consolidation in New Jersey
- Debt consolidation in New Jersey
- Debt consolidation in New York
- Debt consolidation in Texas
- Debt consolidation in Utah
Alternatively, you can also fill out our Choose Your Debt page and we will be in touch with you soon.