Debt Consolidation: How Does It Work? Is Debt Consolidation a Good Idea?

We all want to be debt-free. The great news is that there are several ways you can do to get rid of your debt. One of them is debt consolidation.

What is Debt Consolidation?

Debt consolidation refers to the process of taking out a new loan sufficient to repay some, if not all, of your outstanding debt. Once you get the money, you can pay off your debts, and make a single monthly payment for the new debt.

Debt consolidation works for people who prefer to make a single monthly payment or for people who want to lower the amount of interest they are paying by taking a new loan.

How does loan consolidation work?

There are two primary ways to consolidate debt. The first one is to get a 0% interest, balance-transfer credit card where you can pay off your debts using this card and pay the balance in full within the given period. The other one is getting a fixed-rate debt consolidation loan where you can use the money from the loan to pay off your debt and pay back the new debt in installments over an agreed term.

Is debt consolidation a good idea or a bad idea?

Whether debt consolidation is a good or bad idea, you can only have the answer if you assess your debts. How huge are your debts? If your debt can be paid off in less than a year, then you might as well not bother.

Another important factor to consider when deciding whether debt consolidation works for you is how much you’ll save if you decide to consolidate. For example, you are paying off four credit cards with interest rates ranging from 18% to 25%. Say you qualify for a debt consolidation loan with an interest rate of 7% – a significantly lower interest rate compared to your existing debts. During these instances, where it’s certain you’ll save more money, debt consolidation can be a good idea.

Ultimately, debt consolidation won’t save you from your debt problems. It only works if it includes a plan to prevent running up debt again.

The 8 Best Debt Consolidation Loans of 2019

1. Best Overall: Marcus by Goldman Sachs : The personal loan from Marcus by Goldman Sachs is our top choice due to a combination of competitive interest rates and no fees. There are no origination or prepayment fees (those charged by lenders upon entering into a loan agreement), which is common among top lenders. And unlike others, Marcus also doesn’t charge late fees — but you should still pay on time. Interest rates range from 6.99% to 24.99% APR.

Marcus is a new bank from Wall Street titan Goldman Sachs. Loans take roughly one to four days to fund. The lender is generally well reviewed.

2. Best for Bad Credit: OneMain Financial: OneMain financial has no minimum credit score and accepts some borrowers with poor credit. Origination fees vary by state and interest rates range from 16.05% to 35.99%. While you may pay a higher interest rate at OneMain Financial, if you can’t get approved elsewhere due to past credit mistakes, that may be your only option.

OneMain Financial also offers secured loans, a type of loan where you pledge collateral like a car title to get a lower interest rate. With this type of loan, if you stop paying, you could lose your collateral.

3. Best for Good Credit: Discover Personal Loans: If you have good credit, Discover offers loans of $2,500 to $35,000 with no origination fees and competitive rates. Interest rates run from 6.99% to 24.99% APR depending on your credit. Loan terms vary from three to seven years.

Discover Personal Loans are available for borrowers with 660 credit scores and above. While it can take up to a week to get funded, if you can get a lower interest rate here and no origination fees, it might be the best lender for maximum savings.

If you want more information, you can read through the full review on Thebalance.

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Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.