How Do Credit Card Consolidation Loans Compare To Balance Transfer Card Offers
Compare paying $15,000 on your refinancing credit card to paying it off with a personal loan:
- Personal loan: If you take out a personal loan at 9.5% for 4 years, the resulting payment is $377 per month. The total interest paid will be $3,089. So youll pay a total of $18,089.
- Make the same $377 monthly payments on a credit card with an 18-month introductory period with 0% interest. Over those 18 months, youll have paid off $6,786. Once the balance transfer offer expires, youll start paying interest on the remaining $8,214 balance.
Assuming an interest rate of 16%, if you continue to pay $377 a month, it will take you an additional 26 months to pay off the balance. After 44 months, you will have paid at least $1,414 in interest, totaling $16,414.
In this case, the balance transfer method has got a slight edge.
Of course, many variables affect these numbers. For example, you dont have a fixed interest rate with a credit card. When it goes up, you pay more in interest and take longer to pay the balance. With a credit card, you also need the willpower to make the $377 payment each month.
Additionally, you may be eligible for lower or higher interest rate cards and loans. Researching and comparing your options is essential.
There are many cases where a personal loan may be the better option and others where a balance transfer credit card delivers more benefits.
How Much Does It Cost To Consolidate Your Debt
The cost of debt consolidation depends on which method you choose, but each one of them includes either a one-time or monthly fee. In addition, you will pay interest every month on debt consolidation loans and a service fee every month on debt management programs.
Generally speaking, the fees are not overwhelming, but should be considered as part of the overall cost of consolidating debt.
When Debt Consolidation Is A Smart Move
Success with a consolidation strategy requires the following:
Your monthly debt payments dont exceed 50% of your monthly gross income.
Your credit is good enough to qualify for a 0% credit card or low-interest debt consolidation loan.
Your cash flow consistently covers payments toward your debt.
If you choose a consolidation loan, you can pay it off within 5 years.
Heres a scenario when consolidation makes sense: Say you have four credit cards with interest rates ranging from 18.99% to 24.99%. You always make your payments on time, so your credit is good. You might qualify for an unsecured debt consolidation loan at 7% a significantly lower interest rate.
For many people, consolidation reveals a light at the end of the tunnel. If you take a loan with a three-year term, you know it will be paid off in three years assuming you make your payments on time and manage your spending. Conversely, making minimum payments on credit cards could mean months or years before theyre paid off, all while accruing more interest than the initial principal.
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Consolidate your debt if you can get a loan at better terms and/or it will help you make payments on time. Just make sure this consolidation is part of a larger plan to get out of debt and you dont run up new balances on the cards youve consolidated. Read about how to tackle credit card debt.
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Cons Of Using A Loan To Consolidate Credit Card Debt
Interest rates might not be low enough to make a difference.
You might not qualify for a personal loan if you have too much debt or poor credit.
The lender might charge you an origination fee of 1 to 5 percent of the loan amount.
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Come Up With A Repayment Plan
Before you take out a debt consolidation loan, figure out how much you can afford to pay each month. This will help you decide what loan and repayment plan to go with. Look carefully at your budget, and see if there are any areas you can cut back on.
That will help free up some money so you can stay on top of your monthly payments on your new loan. You might want to find ways to rake in extra cash to put toward your debt repayment. This might be picking up extra hours on the job, doing side hustles such as ride sharing, tutoring, or babysitting.
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What Is Debt Consolidation And Should I Consolidate
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Debt consolidation rolls multiple debts, typically high-interest debt such as credit card bills, into a single payment. Debt consolidation might be a good idea for you if you can get a lower interest rate. That will help you reduce your total debt and reorganize it so you can pay it off faster.
If youre dealing with a manageable amount of debt and just want to reorganize multiple bills with different interest rates, payments and due dates, debt consolidation is a sound approach you can tackle on your own.
Know Your Budget: Track Your Income And Bills
Next, collect recent pay-stubs to understand your typical monthly income .
Now, on the debt side, add to your list of credit card balances a collection of your recent monthly and annual bills. That’ll likely include things like:
- Rent, mortgage and other housing costs
- Utilities, like water, gas, heating and electricity, broken down by average monthly balances.
- Loans and insurance: Car loan and insurance, student debt payments and other personal loan or insurance costs
- Subscription service payment
- Grocery and commuting bills
- Education and child-care costs
- And anything else that’s a regular monthly payment, like gym memberships and public transport costs.
You can also load this information into an online budgeting tool, such as Chase’s Budget Builder, to keep on hand for future reference. There are also plenty of budget apps online that are free and easy to use.
Once you have all of this, you’ll have a clearer understanding of your total expenses and income, and how much credit card debt adds to monthly costs.
Is Debthunch Legit Or A Scam
Crixeo.com awarded Debthunch a 2-star rating . We hope the information below will help you make an educated decision on whether to do business with Debthunch.
- Debthunch is not a lender.
- It appears that Debthunch is operating a typical bait and switch scheme but not for themselves for their lead buyers. They lure you in by sending you direct mail with a offering a ridiculous 0% interest rate to consolidate your high-interest credit card debt.
- Debthunch doesnt tell you that you need excellent credit to qualify for a loan with that low-interest rate .
- While the Debthunch mailer offers incredibly low rates, the licensing information on their site discloses that they are only licensed in California with a Finance Lenders License.
- Their disclosure clearly states INFORMATION FROM YOUR CREDIT REPORT WAS USED FOR THIS OFFER.WE WILL WITHDRAW THIS OFFER IF YOU NO LONGER MEET THIS CRITERIA.
- We are curious to find out how many of the consumers that were mailed this offer actually qualify for 0% interest.
Know What You Want And How To Find It
Before reaching out to a credit counseling agency, write out your financial problems and goals and identify the most important ones.
All certified credit counselors can help you with simple budgeting, and that type of general advice is free. But you may require one with specialized training if you have a specific goal, such as homebuyer education, debt management, bankruptcy counseling or managing student loans, and those services carry fees.
There are two key resources for finding credit counselors:
The National Foundation for Credit Counseling is the nations largest nonprofit financial counseling organization. It offers a localized search tool that can help you find an affiliated agency nearby with specialists who are right for your financial situation. You also can call 800-388-2227 to be automatically connected to the NFCC member agency closest to you.
The U.S. Department of Justice has its own search tool to help consumers find a credit counseling agency. This list is limited to agencies that provide bankruptcy counseling, but many provide other services as well, and all are vetted by the federal government.
Many credit counseling services are available over the phone, making it easy to get financial advice even if there isnt a credit counseling agency in your area.
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Consider A Debt Management Plan
If you’re having trouble finding a balance transfer credit card, personal loan or home equity option at a favorable rate, consider contacting a nonprofit credit counseling agency that can help you set up a debt management plan.
A credit counselor can analyze your situation to help you find the right path. If you choose to get on a debt management plan, you’ll make one monthly payment to the agency, and it’ll pay your creditors on your behalf. Credit counselors can sometimes even negotiate lower interest rates, debt forgiveness or lower monthly payments for you.
You may have to pay a small service or monthly fee, and debt management plans typically last three to five years. Also, you may be required to close the credit accounts that you are consolidating, which could hurt your credit scores. Be sure to ask for all the terms, and keep these potential drawbacks in mind as you compare options.
To find a reputable credit counseling agency, make sure it is accredited by the National Foundation for Credit Counseling.
Potentially Risky Debt Consolidation Methods
When searching for the right way to consolidate debt, you might come across other riskier options. These credit card debt consolidation options could have additional drawbacks youâll want to consider before making any commitments.
1. Home Equity Loans
Home equity loans allow people to borrow money by using their home as collateral. The amount youâre able to borrow is determined in part by how much equity you have in the home. You can estimate this number by subtracting how much you owe on your mortgage from the current market value of the property.
According to the CFPB, you receive a home equity loan in a lump sum. And like a personal loan, you could use those funds to pay down other debts, including credit cards.
But a home equity loan can be risky: If you canât pay it back, you could face foreclosure on your home.
Home equity loans usually have a fixed rate, which means the rate wonât change over time. But itâs worth confirming before accepting a loan. If youâre considering a home equity loan, it also helps to examine whether there are other fees and costs that could make it more expensive than your original debt.
2. Home Equity Lines of Credit
Home equity lines of credit are similar to home equity loans. And they come with the same risk of losing your home. But home equity lines of credit, called HELOCs for short, differ in a few ways.
Itâs wise to examine and understand the details of a HELOC before accepting one.
3. Debt Settlement Companies
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Carrying Multiple Credit Card Balances Heres How To Consolidate Them
If youre paying interest on balances on two or more credit cards, you might be able to consolidate those balances into one loan at a lower interest rate.
Thats worth doing because, instead of multiple payments each month, youd need to make just one. And if you find a better rate, that payment could be lower than the total amount youre paying now.
Tip #4 Take Out A Home Equity Loan
If youre a homeowner and youre making regular mortgage payments, youre building equity in your home. Equity also grows as the value of your home increases. Your equity is whats left when you subtract the amount you owe from the value of the property.
If your home is valued at $300,000 and you owe $225,000, your equity is $75,000. You can use that equity as collateral to borrow money.
This may be a suitable option for credit card debt consolidation if your credit isnt awesome. Thats because home equity loans are secured loans , so they generally offer better interest rates than unsecured loans like credit cards.
However, these loans may include a costly home appraisal and thousands in closing costs. Also, the lender can foreclose on your home if you dont make your payments.
So do your research. Review closing costs, terms, your budget, and any other important factors with a mortgage lender before deciding.
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What Kind Of Interest Rates Can You Get With A Balance Transfer
Many credit card companies offer a tempting mix of generous credit card terms to attract new borrowers and keep current customers from switching to a new card.
Its not uncommon to get card offers with introductory periods of 6 18 months and low or 0% interest rates. You may even get balance transfer checks in the mail to encourage you to move your balances to the new card.
Balance transfers have their perks: You can consolidate your card balances, make a single monthly payment and maybe even enjoy interest-free credit for several months.
But they do come with some terms and conditions.
The minimum monthly payment required for most credit cards is usually between 1% 5% of your outstanding balance. Even with 0% interest, thats not going to be enough to put a significant dent in your debt before the introductory rate expires.
Lets say you transferred your hypothetical $15,000 balance to a new card with a 0% APR for 18 months, and the minimum payment is 1% or $150 a month.
After 18 months, you will have only paid off $2,700 of your $15,000 balance and youll be left with a balance of $12,300, a higher interest rate and a larger monthly payment.
To get a bigger bang for your balance transfer, youll need to commit to paying more every month. If you could make a monthly payment of $833, youd be debt-free before the end of the 18 months.
What Are My Options
You have some options for paying down debt by merging accounts into one:
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How To Consolidate Your Debt
There are two primary ways to consolidate debt, both of which concentrate your debt payments into one monthly bill.
Get a 0% interest, balance-transfer credit card: Transfer all your debts onto this card and pay the balance in full during the promotional period. You will likely need good or excellent credit to qualify.
Get a fixed-rate debt consolidation loan: Use the money from the loan to pay off your debt, then pay back the loan in installments over a set term. You can qualify for a loan if you have bad or fair credit , but borrowers with higher scores will likely qualify for the lowest rates.
Two additional ways to consolidate debt are taking out a home equity loan or 401 loan. However, these two options involve risk to your home or your retirement. In any case, the best option for you depends on your credit score and profile, as well as your debt-to-income ratio.
Use the calculator below to see whether or not it makes sense for you to consolidate.
Home Equity Loan Or Heloc
How it works
With a home equity loan, you borrow against the value youve built up on your home. Your home equity is the difference between how much you owe on your mortgage and how much your home is worth. A home equity loan is typically a lump sum loan that you pay back at a fixed interest rate.
A home equity line of credit allows you to make multiple draws over a period of time, and is usually paid back at an adjustable rate.
Pros of a home equity loan for debt consolidation
- Low interest rates. As a secured loan, home equity loans and HELOCs tend to have lower interest rates than youll find on personal loans.
- Can be easy to get. If you have equity in your home, youll probably be able to tap part of it.
Cons of a home equity loan for debt consolidation
- Risk of foreclosure: If you fail to make your monthly payments, you could lose your home to foreclosure. This isnt possible with a credit card.
- Steep closing costs: Home equity loans may have sizable closing costs that eat into the amount you have to settle debt.
- Possibly harder to sell or refinance: Taking out a home equity loan could make it more likely youll be “underwater” on your home, or owe more on it than it is worth.
When you might consider it
You may need to use a home equity loan to consolidate credit card debt if you cant qualify for other options but have a significant amount of equity in your home.
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