If you are anything like one of the huge number of Americans who have credit card debt, you may feel like you are swimming in a sea of red. Monthly payments and interest rates can add up quickly, making it difficult to make any progress on getting rid of your balances. You may actually be considering debt consolidation as a way to get your debt under control. Is this option right for you? Here’s what you need to know.
What is debt consolidation?
Debt consolidation is the process of taking multiple debts and combining them into a single loan. This can be done with a personal loan, a home equity loan, or a credit card balance transfer. The goal is to get a lower interest rate and/or a longer repayment term, which will make your monthly payments more manageable.
How does it work?
When you consolidate your debts, you will create a new loan with a single monthly payment. This payment will be based on the total amount of debt you are consolidating, as well as the interest rate and repayment term. You may also be required to pay an origination fee and/or an annual fee. For instance, OneMain Financial loans for debt consolidation allow you to borrow to consolidate debts such as credit cards, household bills, installment loans, or medical bills.
What are your options?
There are a few different ways to consolidate your debts:
- Personal loan: A personal loan is a loan from a lending institution, such as a bank or credit union. This type of loan may be unsecured, which means there is no collateral (such as a house or car) pledged as security. The interest rate is usually higher than a secured loan, but it can be a good option if you have a good credit score. Secured personal loans are also available from some lenders.
- Home equity loan: A home equity loan is a loan against the equity in your home. This type of loan is secured, meaning the lender can seize your home if you don’t repay the loan. The interest rate is usually lower than a personal loan, and you may be able to borrow more money.
- Credit card balance transfer: This is a process where you transfer the balance of your high-interest credit cards to a new credit card with a lower interest rate. Be aware that most balance transfer cards charge a fee of 3%-5% of the transferred amount.
Which option is right for you?
The best and most decisive way to figure out which option is right for you is to compare Annual Percentage Rates (APR), the amount of cash available to you, and whether you have to provide collateral to secure the loan. Remember that if you secure a loan with your car or home as collateral, you could put them at risk of forfeiture if you default on your loan.
Debt consolidation can be a great way to get your debt under control. By consolidating your debts, you can get a lower interest rate and/or a longer repayment term. This will make your monthly payments more manageable and help you pay off your debt faster. Be sure to calculate your Debt-to-Income Ratio (DTI) to see if you qualify for a personal loan or home equity loan. Remember, the best way to get out of debt is to create a budget and stick to it!