Bottom Line Up Front:
- A debt consolidation loan can help you pay off several debts at once and streamline your monthly payment into one fixed amount.
- Personal loans are most often used for home renovations, unexpected expenses or emergencies.
- Loan amounts with Navy Federal range from $250 to $50,000.
Taking out a personal loan or consolidating your debt can be a helpful financial move. If you need help paying for upcoming expenses or consolidating high-interest debt, one of these options may be just what you need.
What Other Debt Consolidation Options Do You Have
Beverly Harzog, credit card expert and author of The Debt Escape Plan, offers an alternative to personal loans for paying off debt.
If you have excellent credit scores, you may be better off getting a balance transfer credit card that offers a 0% introductory APR, Harzog notes. This way, you can pay off the debt without paying interest.
Of course, this is only true if you pay off your balance before the introductory APR period expires.
If your credit prevents you from qualifying for an introductory 0% APR, a personal loan may be a good option. But keep in mind that you still have to meet the lenders qualifications.
Your goal is to get an interest rate lower than the one youre currently paying on your credit cards, Harzog says.
Other debt consolidation options include applying for a home equity loan, taking out a retirement account loan or applying for a cash-out auto refinance. Be sure to weigh the pros and cons of each so that you pick the best option for your situation.
How To Pay Off Credit Card Debt Without A Personal Loan
There are lots of other ways to pay off credit card debt if a personal loan isn’t an option for you. Balance transfer credit cards allow you to move your credit card balance to a card with 0% APR for a period of time. This is a solid choice if you have good or excellent credit, which you’ll need for a balance transfer card with favorable terms, and you’re able to pay off the debt during the interest-free period.
You may also choose to send any extra money you earn or save to certain debts to get rid of them, starting with your smallest balance or highest-rate debt. Paying off your smallest debts first, known as the debt snowball method, won’t save you as much money as the debt avalanche, during which you’ll pay off balances with the highest interest rates first. But the ideal method for your situation is the one that will encourage you to keep going and get your balances down to zero.
You might also consider working with a certified at a nonprofit credit counseling agency. A credit counselor can provide a free evaluation of your debt and offer suggestions for paying it off, taking into account your budget, debt balances and other financial goals.
One additional consideration: As compelling as it may be, it’s best not to close the account when your credit card balance is paid off. Closing a reduces your overall available credit and, if you have a balance on other cards, will increase your credit utilization ratio and have a negative effect on your credit scores.
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Where Payoff Falls Short
Moderate funding time: If same or next-day funding for a debt consolidation loan is a priority, there are other lenders to consider. However, Payoffs two-day funding time is still decent compared to some competitors.
May charge origination fee: Payoff may charge an origination fee up to 5%. This fee is taken from the total loan amount when the loan is issued. Though this is the only fee Payoff charges, some lenders charge zero fees, including origination fees.
No rate discount for autopay: Unlike other lenders, Payoff does not offer a rate discount for setting up autopayments. This discount usually ranges from 0.25 to 0.5 percentage points and can reduce the overall cost of your loan.
No co-signed, joint or secured loan options: Payoff only offers unsecured debt consolidation loans, meaning theres no option for borrowers to submit a joint application, add a co-signer or secure the loan with collateral to qualify for a better rate or a larger loan.
What Is Debt Consolidation
Debt consolidation is the process of combining two or more debts into a single larger debt. This step is often taken by consumers who are burdened with a significant amount of high-interest debt.
Its often used to combine credit card debts, auto loans, student loans, medical debt or other types of loans into a new loan, says Katie Ross, executive vice president of the nonprofit American Consumer Credit Counseling. Then the borrower only has to pay one monthly payment instead of a separate payment for each debt.
In addition to simplifying your finances, debt consolidation ideally gives the borrower more favorable loan terms, such as a more competitive interest rate.
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Disadvantages Of A Debt Consolidation Loan
While a debt consolidation loan is a great option for many consumers, this option is not without its disadvantages. Here are some of the disadvantages you should know about before you make any decisions.
- A decent credit score is important
- An unsecured debt consolidation loan can come with a high-interest rate
- Youll still have to pay off the full amount of debt you owe youre simply making it easier on yourself
A Real Example Of Credit Consolidation
Heres an example of how it works when you use a debt management program to consolidate. Lets say you have four credit cards.
New average interest rate : 5.73%
New monthly payment: $303
Time to pay off total balance: 4 years, 10 months
Total estimated interest charges: $2,459.65
In this example, consolidation would:
- Lower your monthly payments by $324.92
- Allow you to get out of debt six years and three months sooner
- Save you $6,453.33 in interest charges
You still pay back the full balance owed, but you do it in a more efficient way by minimizing interest . Consolidation lowers your monthly payments, the number of payments you need to make to become debt-free, and the total interest charges.
While balance transfers and debt consolidation work differently, the result is the same. You still minimize interest, combine your debts into one monthly payment, and enjoy the same benefits that you see in the example above.
If you have questions about debt consolidation or need help finding the best way to consolidate, talk to a certified credit counselor for free.
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Can You Afford To Pay Off Your Credit Cards
Consolidating your credit card debt doesn’t eliminate it. Even if the consolidation loan reduces your monthly payment, you still have to pay off all you owe. So, if you don’t have a steady income or can’t afford your monthly payment, consolidating your credit card debt probably won’t help you get back on track.
Personal Loans And Debt Consolidation Loans
Personal loans are often used for renovating your home or covering unexpected expenses. A debt consolidation loan is a type of personal loanits used to pay off several debts, streamlining your monthly payments into one fixed amount. Both types of loans offer lower interest rates compared to credit cards. So, which should you choose, and whats the difference?
The main difference between the two is the purpose of the loanwhether its for debt consolidation or personal expenses. With a debt consolidation loan, the requested loan amount is based on the existing loan balances youre looking to consolidate. The funds you receive from the loan will go toward paying off those debts.
When you borrow money with a personal loan, the financial institution may be able to deposit the funds right into your checking or savings account. You may choose to spend them on personal expenses, pay off other debt or a combination of both.
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You Have A Plan To Pay Off Your Debt
Before you make a decision, you need to have a plan to pay off your debt. If you simply roll all your credit card balances into one big personal loan without having any idea how youll pay that debt off in the next five years, then you might as well not have bothered.
Is the new monthly payment feasible? Or will you find yourself struggling to pay it, and thus end up relying on your newly balance-free credit cards? It pays to be honest with yourself about your own willpower and financial savvy: Lying to yourself about what you can and cannot do will only lead to disappointment and more debt.
How Debt Consolidation Can Help Your Credit
Consolidating debt could improve your credit in a few ways:
- Could lower your credit utilization: If you have debt from revolving credit , you can change it to installment credit through a debt consolidation loan. Credit scoring models treat revolving and installment credit differently generally, revolving credit has a bigger impact on your credit through your overall credit utilization, which is the percentage of your total available credit that youre using. Reducing your credit utilization through debt consolidation could give a big boost to your .
- Might help diversify your credit: Taking out a debt consolidation loan means youll be adding a new type of loan to your credit mix. Credit scoring models like to see that you can handle both revolving and installment credit, so by diversifying the kinds of debt you have, your credit could improve.
- Puts you on a set repayment schedule: If you decide to use a personal loan to pay off your debt, youll have a fixed monthly payment with a set repayment term. This could make it less tempting to continue adding to your debt compared to a balance transfer card. As you pay down your debt, youll likely see your credit score go up.
If you decide to take out a debt consolidation loan, you can use our personal loan calculator below to estimate your monthly payments.
Simply enter the loan amount, interest rate, and loan term to see how much youll pay over the life of the loan.
Checking rates wont affect your credit score.
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Do Debt Collections Fall Off Your Credit Report Forever
Kevin is a former fintech coach and financial services professional. When not on the golf course, he can be found traveling with his wife or spending time with their eight wonderful grandchildren and two cats.
At a Glance
How long does it take for collections to fall off your credit report? It happens automatically seven years after the collection is initiated. That doesnt mean that the debt disappears. You may still be liable for it and creditors can take legal action against you if they want to collect, provided your states statute of limitations has not expired.
For consumers, theres an understandable desire to pay off debt in collections as quickly as possible, but that wont make it drop off any sooner. Debt collections, whether paid or unpaid, remain on the report for seven years. What happens when debt falls off a credit report is one of the topics well cover in this article, along with how to avoid collections.
How To Find An Accredited Nonprofit Credit Counseling Agency
Legitimate credit counseling agencies offer financial help, including debt management plans and debt consolidation advice, for free or at a minimal charge. These agencies also provide credit counseling, budgeting guidance, and debt management advice at no or low cost. To find a legitimate credit counseling agency:
- Look for a company that’s accredited, usually by the Council on Accreditation or the International Organization for Standardization .
- Check to make sure no complaints have been filed against the company with your state attorney general’s office, the Better Business Bureau, and local consumer protection agencies.
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Pros And Cons Of Debt Consolidation Loans
It is important to remember that you are choosing to roll multiple old debts into a new loan. You are taking on additional financial risk, which can have unexpected consequences if not done properly.
A debt consolidation loan should carry a lower interest rate to help make the monthly payment more affordable and save you money on interest payments.
Secured loans generally provide the lowest interest rate and are easier to obtain if you can provide the required collateral. However secured loans can be dangerous because you put any pledged property at risk. If you cant make your monthly payment, your lender will seize your house or car to collect on any unpaid loan balance.
An unsecured debt consolidation loan is harder to get if you have bad credit. The interest rate is also much higher as the lender assumes more credit risk with an unsecured loan. Lenders may be much stricter when looking at your debt-to-income ratio if you are applying for an unsecured loan to ensure you have the financial capacity to make the required monthly payments.
A line of credit often has the benefit of interest-only payments. Making minimum payments that barely pay down principal balances can result in a payment that is low enough to balance your budget and make managing your finances easier, but it can keep you in debt longer. A line of credit style loan is usually a variable-rate loan, which means your monthly payment will increase if interest rates rise.
If Youve Considered The Fees
Dont get blindsided by any mystery fees. They should factor into your decision on whether its worth taking out a personal loan, which often come with origination fees. These are one-time costs you pay upon loan approval. These fees typically range from 1% to 10%. If you are consolidating $15,000 in credit card debt, then you could be hit with a surprise origination fee as high as $1,500 if youre not vigilant when reading the contract. Some lenders eschew origination fees, but they usually end up factoring that cost into your monthly payments, which makes your APR higher. Always read the fine print and do the math before taking on new debt.
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How Does Debt Consolidation Work
In general, debt consolidation is limited to unsecured credit obligations. These may include credit cards, student loans, and unsecured installment loans you currently owe. Medical bills may also fit into this category. However, if you want to refinance a secured loan, like a mortgage, youll generally need to look at different financing options.
There are a few common ways to consolidate unsecured debts. The chart below features highlights and a comparison of two of the most popular debt consolidation options.
Your Credit Card Debt Relief Options During Covid
If the financial impact of the coronavirus pandemic has you thinking about consolidating your credit card debt, youre not alone and you may have additional avenues for financial relief.
Below are links weve compiled on relief measures that some credit card issuers, other creditors and the government have announced to help people during this time. Check out these summaries to look for measures and creditor programs that could apply to your situation.
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Avoid Companies That Make Unrealistic Promises
Some companies advertise that they can get you out of debt no matter how much you owe. This is unrealistic.
Dont trust a company that:
- is not licensed
- won’t put all loan costs and the interest rate in writing before you sign
- arranges a business loan when all you need is a basic consumer loan
Check the company is a member of the Australian Financial Complaints Authority . This means you can make a complaint and get free, independent dispute resolution if needed. If they are not a member of AFCA, don’t deal with them.
Should You Consolidate Your Credit Card Debt
But if multiple credit cards are in use and repayments are missed, the build-up of interest and late fees can quickly start to feel overwhelming.
If you find yourself in this situation, you might be wondering whether debt consolidation is the answer to your credit card debt troubles. Here, well talk through the basics of credit card debt and the options you might consider to take back control of your finances.
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When A Personal Loan Isnt Right For Your Credit Card Debt
While refinancing credit card debt from a significant event or purchase can make sense for many people, there are certainly times that it doesnt, including:
If youre unsure whether you can commit to a set monthly payment. Unlike credit card payments, which can be made for any amount above your minimum, a personal loan locks in your interest rate by putting you on a set payment planfor the same dollar amount each month.
If you have less-than-stellar credit, as this can make it hard to get approved for a loan. Even if you are approved, the rate for a borrower with poor credit will be toward the higher end, meaning you may not save any money.
If youre using a personal loan so that you can continue to add additional purchases to your credit card. Consider a personal loan a one-time way of lowering your rate for a large sum that youre planning to pay off.
If youre planning to pay off your credit card debt soon, and in one lump sum in the near futureperhaps youre waiting for a bonus or tax refund, for example. In this case, its probably not worth going through the application, approval, and signing process to get a loan that youll end up paying off shortly.
Paying off credit card debt with a personal loan isnt for every situation, to be sure. But for financially responsible borrowers paying down debt from a one-time purchase, a loan can make a lot more sense both financially and in terms of the peace of mind a locked-in payment plan can bring.