Navigating the complexities of managing debt can be overwhelming for many consumers. Debt consolidation can offer a strategic approach to managing and paying off multiple debts in ways that work to build financial health, not detract from it. If you’re struggling with multiple credit cards or loan debts, here’s what you need to know about taking out a debt consolidation loan.
What Is Debt Consolidation?
Debt consolidation is a financial strategy that combines multiple debts into a single loan with a lower interest rate and a simplified payment process. This approach makes managing payments easier and reduces the amount of interest paid over time. You can consolidate debt of various kinds, including credit card debt, student loans, and various types of personal loans.
When to Consider Consolidating Your Debt
Debt consolidation can be a strategic tool for managing and reducing debt, but it’s not a one-size-fits-all solution. It’s essential to evaluate your personal financial situation thoroughly and consider whether consolidation aligns with your long-term financial goals. This may be a sound solution for you if:
- You have multiple debts with relatively large balances that are difficult or overwhelming to manage.
- Your total debt does not exceed 50% of your income.
- You can get a consolidation loan offer with an interest rate that is lower than the average interest rate you are currently paying on your debts as a whole, which can save you hundreds or thousands of dollars in interest over time.
- You can get a loan consolidation offer that also lowers your monthly payments and allows you to pay off your debt in a timeframe that is realistic and reasonable for you.
If you’re unsure whether debt consolidation is a wise move for you, consider speaking with a credit counselor or other financial education specialist to explore all of your debt relief options. It’s always best to get professional guidance before making any major financial move to ensure you’re making a sound decision. Doing so can significantly reduce your stress levels, too!
How to Consolidate Debt (How Loan Consolidation Works)
Debt consolidation typically involves obtaining a new loan to pay off multiple debts. This new loan ideally comes with a lower interest rate, making it more economical over the loan’s life span. You can consolidate your debt using a number of methods:
- Transfer credit cards
- Personal loans
- Home equity loans (if you own your home)
Each method has different pros and cons, another reason why choosing the right debt relief method for you depends on your individual financial situation and the nature of the debt.
Considerations for Choosing a Debt Consolidation Lender
There are plenty of debt consolidation lenders to choose from. Selecting the right one requires careful consideration of several factors. Do your homework on the following:
- Reputation and reliability. As you start making your list of lenders to consider, strive to include and prioritize those with a strong track record for customer service and reliability. This can be gauged through reviews and ratings on reputable financial websites.
- Eligibility requirements. Lenders have varying criteria for loan approval, including credit score requirements and income thresholds. Ensure that you meet these criteria before applying.
- Compare offers from multiple lenders. You’ll need to gather loan information from your list of lenders to determine which offers the best terms. Be sure to collect the same complete set of data from each so you can compare them accurately.
- Interest rates and fees. Look for competitive interest rates and be wary of any additional fees associated with the consolidation loan. It’s crucial to read the fine print to avoid any unexpected charges.
- Loan terms. Consider the repayment terms offered by each potential lender. It’s crucial to ensure that the monthly payments are manageable and the loan term is not excessively prolonged, as longer terms can result in higher total interest costs.
- Lender type. It can be immensely beneficial to explore debt consolidation options with a nonprofit lender, such as a credit union or a community development financial institution (CDFI). Nonprofit organizations are driven by empowering consumers and fostering socioeconomic success for vulnerable communities—not by making money from them. Besides being ethical and consumer-friendly, nonprofit lenders also strive to educate borrowers so that they can make informed decisions.
Get a Debt Consolidation Loan Today With the Economic Justice Fund
The Economic Justice Fund (EJF) is a mission-driven, nonprofit lender dedicated to helping Americans pursue the American Dream. We believe that all Americans, regardless of income, race, gender, or zip code, should have access to fair, affordable financing.
EJF offers low-cost loans that help you reach your goals safely and responsibly. You can complete our application in less than five minutes, and one of our Loan Specialists will review it quickly. Loans are funded in as little as one business day. Apply today!
EJF is certified as a Community Development Financial Institution (CDFI) by the U.S. Department of the Treasury. In addition to ethical, equitable loans, we provide financial training and credit building services to empower individuals in underserved communities. Read our success stories and choose the financing plan that fits your needs!
FAQs
Debt consolidation is a process that involves combining multiple debts into one single loan. By consolidating your debts into one loan with a lower interest rate, you can benefit from reduced monthly payments and overall interest costs.
What is the catch with debt consolidation for the consumer? ›
You may pay a higher rate
Your debt consolidation loan could come with more interest than you currently pay on your debts. This can happen for several reasons, including your current credit score. If it's on the lower end, lenders see you as a higher risk for default.
Is accredited debt relief legit? ›
Accredited has received hundreds of positive customer reviews over the past year from TrustPilot and gets an A+ grade from the Better Business Bureau. Clients typically end up repaying about 55% of their enrolled debt, but Accredited's fee of up to 25% can be significant.
Is California debt relief real? ›
California debt relief is a real thing. It's available through a number of different California Debt Relief programs, including the state's Debt Relief Program and Mortgage Assistance Program.
Does national debt relief hurt your credit? ›
Payment history accounts for 35% of your FICO credit score, so enrolling in a plan with National Debt Relief could negatively impact your credit rating. The extent of that impact, however, depends on whether you're still current on your bills or not.
Will a debt consolidation ruin my credit? ›
If you do it right, debt consolidation might slightly decrease your score temporarily. The drop will come from a hard inquiry that appears on your credit reports every time you apply for credit. But, according to Experian, the decrease is normally less than 5 points and your score should rebound within a few months.
What is the disadvantage of debt consolidation? ›
The potential drawbacks of debt consolidation include the temptation to rack up new debt on credit cards that now have a $0 balance and the possibility of hurting your credit score with late payments. Also note that the best personal loans go to consumers with very good or excellent credit, so not everyone can qualify.
Is there really a government debt relief program? ›
Unfortunately, there is no such thing as a government-sponsored program for credit card debt relief. In fact, if you receive a solicitation that touts a government program to get you out of debt, you may want to think twice about working with that company.
What is the best debt consolidation company? ›
- SoFi. Best debt consolidation loan. ...
- Oportun. Best for borrowers with bad credit. ...
- Best Egg. Best for secured loans. ...
- PenFed Credit Union. Best for low rates and fees. ...
- Laurel Road. Best for pre-qualification. ...
- OneMain Financial. Best for fast funding. ...
- LendingClub. Best for direct creditor payments. ...
- First Tech Federal Credit Union.
Debt relief will also often give you a fixed payment plan and a set payoff date, which can also make it worth considering — as streamlining your payments can make it easier to manage while helping you save money on interest. "One of the biggest advantages of going through a debt relief program is the savings.
California Coerced Debt: California SB 975, for debts incurred after July 1, 2023, requires a collector to cease collection until it completes a review when the debtor provides documentation and a sworn statement that the debt was coerced. A person who coerces a debt is civilly liable.
Is debt hardship relief legit? ›
The email claims to be from a government agency or organization that offers financial assistance to those in need. The email says you have been approved for financial support and to call a phone number to finish enrolling in the program. However, it is all fake.
What is the debt free program in California? ›
The path to a debt-free UC
UC is committed to making it possible for all of our California undergrads to complete college without taking out loans by 2030. The debt-free plan will cover the full cost of UC — including housing and food — through grants, scholarships and work-study.
Can I buy a house after debt settlement? ›
How Long After a Debt Settlement Can You Buy a House? There's no set timeline for how long it takes to get a mortgage after debt settlement. Your ability to qualify for a mortgage will depend on how well you meet the lender's requirements on the issues raised above (credit score, DTI, employment and down payment).
Is debt relief or consolidation better? ›
Which Option Should You Choose for Managing Debt? Debt consolidation is generally considered a less damaging option for your credit. It may be a better choice for those with good credit who can qualify for a lower interest rate.
Is it good to use Freedom Debt Relief? ›
FAQs About Freedom Debt Relief
Yes. It's operated since 2002 and served over 1 million clients to date. The firm is a member of the American Association of Debt Resolution and the Financial Health Network and holds an IAPDA Certification. They are also accredited by the Better Business Bureau with an A+ rating.
Is a debt consolidation program a good idea? ›
Debt consolidation can be a good idea if you're having a tough time juggling your financial obligations. Consolidating can put your debt in one place, so you have a single monthly payment. That might help you stick to your repayment schedule and avoid any adverse consequences.
What is the downside to debt relief? ›
Debt relief programs and strategies aim to resolve credit issues caused by built-up debt. But, much like the debt itself, the relief option you choose will impact your future finances. You could be left with hefty fees or even more damage to your credit score.
Can you get your money back from a debt consolidation company? ›
If you have paid money to a debt settlement or consolidation company and they have not provided any real results, you may be entitled to get your money back.
What happens to all the debts with a debt consolidation loan? ›
These loans convert many of your debts into one loan payment, simplifying how many payments you have to make. These offers also might be for lower interest rates than what you're currently paying.
