How to consolidate debt. Debt Consolidation Loan. Balance Transfer. HELOC & HELOAN. DMP.

If you have a lot of debt, you might have come across the idea of consolidation. We're going to cover what debt consolidation is, how it works, whether it would be a good idea for your situation, how it will affect your credit score, how to get a debt consolidation loan, and what are the best debt consolidation loan companies. We've spent years in the lending industry. We understand personal loans from the company perspective, as well as from the borrower's perspective. With that experience, we're going to tell you everything you need to know about consolidating debt. The idea of debt consolidation is pretty simple. You combine several outstanding debts into a single personal loan. Let me give you a quick example. Suppose you have the following debts. When you consolidate, you would take out a personal loan for just over $15,000 and use the proceeds of the loan to pay off all of these debts. You might wonder why you would bother to do that. Aren't you just trading one debt for another? How does that actually improve your situation? There are several benefits. The first one is that a personal loan has a fixed term length. That means that you will make steady progress paying off the debt. For a $15,000 loan, you probably wouldn't want a term longer than five years. On the other hand, if you make just the minimum payments on your credit cards, you'll be paying the debt for 10 or 15 years. So the debt consolidation loan puts you on track for significantly faster debt payoff. The second thing about consolidating credit card debt is that you need to make sure that the APR of the new loan will be two to three percentage points lower than the interest rate of any of the loans you are consolidating. If you do that, more of your payment will be going towards principal and less of it will be paying interest. That means you will pay off the debt faster and save money in the long run. The last benefit is that you no longer have to multiple monthly payments. You just need to manage one payment. Now that's nice, but it really isn't a great reason on its own to consolidate. So you need to make sure you're getting a good interest rate and a shorter loan term. Now there are four different ways to consolidate debt. The first one is a debt consolidation loan. The most common method is using a personal loan. You borrow a lump sum of money to pay off your existing debts, then you pay off this new loan in installments. The second way is balance transfer credit cards. If you're consolidating credit card balances, you could transfer high interest credit card debt to a new card with a lower APR. Some credit card companies will even offer a zero percent introductory rate for a set period, usually between This gives you a chance to pay down the debt without accruing additional interest, though a balance transfer fee of around five percent will almost always apply. The third way to consolidate debt is a home equity loan or a home equity line of credit. You could borrow against the equity in your home to consolidate debt. This option often comes with lower interest rates, but it puts your home at risk if you fail to repay the loan. You can also usually borrow greater amounts when you secure the loan. This can help you if you can't qualify for enough money with an unsecured loan to consolidate all the debt you want to include. The fourth way to consolidate debt is with a debt management plan or a DMP. These plans are typically offered by credit counseling agencies. The agency negotiates with your creditors to reduce your interest rates and consolidates your payments into one monthly payment that you make to the agency, which then distributes the funds to your creditors. Is debt consolidation a good idea? Debt consolidation can be an effective way to save money on interest and accelerate your efforts to pay off your debt. However, whether it's a good idea for you will depend on your personal financial situation, the kind of deal you get, and how well you manage the loan. There are several pros of Simplified payments. Instead of multiple due dates and creditors to keep track of, you have just one payment to make each month. Lower interest rates. If you qualify for a loan with a lower interest rate than what you're currently paying, you can save a lot of money on interest. Fixed monthly payments. A debt consolidation loan is amortized, which means that the interest rate, the payment, and the terms are all fixed at the beginning of the process. Quicker repayment. Some debt consolidation options like personal loans may have shorter repayment terms, helping you pay off your debt faster. Smaller monthly payments. Most debt consolidation loans will have smaller monthly payments than what you are currently paying, at least initially. That can give you a little bit of breathing room in your finances. The cons of debt consolidation include qualification requirements. If you have poor credit, you may not qualify for a low interest consolidation loan. If you can't get an APR of at least two to three percentage points lower than the interest rate on your current debts, don't consolidate. Fees. Balance transfer and home equity loans can come with fees, which might offset some of the savings from consolidating. Temptation to accumulate more debt. After consolidating your debt, you might be tempted to start using your credit cards again, which could lead to further debt accumulation. Longer payoff. If you consolidate a personal loan, you might roll that debt into a consolidation loan with a longer term. It's possible that you would be just delaying the time you are out of debt by consolidating. What are the risks of consolidating debt? While debt consolidation can help make your life easier, it's not without its risks. One risk is losing your collateral. If you consolidate using a secure loan like a HELOC or a YI loan, you could risk losing your collateral if you run into trouble repaying. Another risk could be extending your payment terms. Also, if you're not careful, a debt consolidation loan could extend your repayment period. That can lower your monthly payment, but it would probably result in paying more interest over time, even if the APR is lower. Another risk is increasing your debt load. There is often a temptation to take out a loan that is bigger than what you need, or to free up your credit card balances and start spending again. If either of these are a serious temptation to you, consolidating could make your financial situation worse. There is a risk that you could also incur unexpected fees. If you are using a traditional personal loan to consolidate, all unavoidable fees should be represented in the APR. But if you are using a credit counseling agency, they might charge you a fee for their services that are not accounted for in the loan. Consolidating could also affect your credit. But this cuts both ways, actually. It could improve your credit score, but it could also hurt it. In fact, let's get into that right now. How does debt consolidation affect your credit score? Credit scores are really complicated, and there's no way for us to tell you exactly how debt consolidation would affect your particular situation. But we can tell you the ways in which it will affect your credit report, and the likelihood that those ways will significantly impact your credit score. Let's start with the ways that it could be beneficial to your credit score. In our analysis of millions of credit files, we found that there is a linear relationship between your credit score and your utilization. Utilization is the percentage of your available credit that you are currently using. If you consolidate credit card debt, you are effectively dropping your utilization of those cards to zero. That should have a very positive impact on your credit score. The more important factor to a strong credit score is having an unbroken history of on-time payments. If consolidating your debts can help you avoid being late on any of your other payments, consolidating could help you steadily improve your credit. Now let's look at the ways that consolidating could hurt your credit score. When you take out a new loan, the lending company will put a hard inquiry on your file. Hard inquiries can hurt your credit score up to about 15 points for a few months. As long as you aren't regularly adding hard inquiries, this effect should fade within three months. The other thing adding another loan could do is drop your average age of credit, especially if you close any of your other accounts. If some of your debts are credit cards without annual fees, you could keep them open and keep them aside, or use them for a single purchase every month and pay the balance in full. That could offset the impact of drastically changing your credit mix too quickly. Finally, like any debt, if you are late on any of your loan payments, it will hurt your credit score. Every time a payment is reported 30 days late, it is a meaningful negative hit to your credit score. When you're looking for a debt consolidation loan, the most important thing you can do is to shop around. You never know which lenders will approve you and who will give you the best interest rate. If you can, get two to three offers in hand before you decide to take the loan. At The Yukon Project, we've tried to make shopping around easy. If you're looking for a debt consolidation loan, you can visit our loan marketplace page. There you can select debt consolidation loan. You can apply to any one of our featured lenders. Behind the scenes, we will check your rate with up to 40 other lenders. Our partners use a soft credit check, so applying won't hurt your credit score. We will show you all of the approved offers, so you can pick the loan that's best for you. If you want to check to see if transferring your balance to a new credit card with an introductory rate is best for you, we've got that covered too. You can visit our credit card marketplace. There we have over 150 credit cards with their latest offers. You can scroll through and find the opportunity that best meets your needs. What is the best debt consolidation company? Choosing the right debt consolidation company depends on your needs, financial situation, and preferences. When we track debt consolidation companies, we look for companies that have features that help people who are consolidating, like the ability to add co-signers, direct debt payoff, and low fees. If you have good to excellent credit, some of the best companies for debt consolidation include Discover, Happy Money, SoFi, TD Bank, and Wells Fargo. If you have fair to good credit, some of the best debt consolidation loan companies include Achieve, Besteg, Lending Club, and Upgrade. Debt consolidation can be a helpful tool in managing debt, but it's important to weigh the benefits and risks before making a decision. If you have any experience with debt consolidation, please consider leaving a below. At The Yukon Project, we're trying to build a community of people who can pool their experience so we can all be better informed when making decisions about our personal finances. If you found this information useful, please like this video and subscribe to our channel. Your support is helpful and we really appreciate it. Thanks for watching.