Tag: Debt Consolidation

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The Risks of Debt Consolidation 

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If you’re one of millions of Americans trying to get rid of consumer debt, you’ll do almost anything to pay it off quickly: work long hours, take on a part-time job, sell your belongings in a yard sale. 

When you’re feeling helpless about your debt, consolidating your loans might seem like the best option, especially if you have multiple types of loans weighing you down.  

Why is debt consolidation so popular? Consolidation involves either taking multiple loans and converting them into one loan, or transferring one loan with one lender to another one, locking in more favorable terms along the way. Most of the time, people consolidate because they get a better interest rate they want to take advantage of. After all, a lower interest rate could help people pay off the debt faster and save money at the same time.  

Other consumers like to consolidate if they have multiple loan payments that are proving difficult to juggle. Consolidating can simplify their finances and ensure that they’re not missing any payments. 

However, consolidating your debt isn’t risk-free. Indeed, it’s a strategy with many potential repercussions, not the least of which are the impacts to your credit score and your financial future in general. Many people sign up for debt consolidation thinking it’ll change their lives, without realizing what they’ve actually agreed to. 

Risks to consider before consolidation  

You may pay more interest over time.  One of the biggest risks when consolidating a loan is that you could end up paying more than you did before. If your consolidation loan has a longer loan term (that’s how much time the lender gives you to pay back the loan), you might pay more in interest overall than if you had kept your other loan(s) as is. 

When some people consolidate their loans, they find that their monthly payments are now less than in the past. Some vow to keep paying the same amount anyway, to take advantage of lower interest rates and take bigger chunks out of the principal in the process. This is ideal. If you simply keep paying your new reduced monthly payment, it could take longer to pay off the loan and you could face higher interest charges in the long run.

Your credit might take a temporary hit. You might decide that paying down debt is worth the risk of a temporary ding to your credit, but it’s still a risk worth noting.  If you are taking out a new credit card,  a home equity loan or any other type of loan to consolidate debt, the lender will have to pull your credit report.  

Every time you open a new form of credit, it has two impacts on your credit score. First, it counts as a hard inquiry and can erode your score.  New credit inquiries will also stay on your credit report for a year, according to Experian, complicating attempts to take out another loan. 

Secondly, a new debt on your report decreases the average age of your credit. The lower your credit age, the lower your overall score. 

Which doesn’t mean you should avoid debt consolidation. It just means you should consider the pros and cons. Indeed, the benefits of debt consolidation can certainly outweigh this risk.  

Debt relief fees. Some consolidation companies that promise to service your debt also end up charging high fees for something you can do yourself. Before consolidating, read reviews of banks and lenders to see which one will have the fewest fees and best rates you can get. 

You may not solve the underlying issue.  When you take out a new loan to repay other debts, you may not be fixing whatever foundational problem dragged you into debt in the first place. It’s one thing to face an unexpected medical emergency that resulted in bills you can’t afford to cover out of pocket. But if your debt is the result of overspending or a lack of budgeting, then you may only be treating the symptoms of a bigger condition. Because you are trading in one set of loans for another, you may still struggle to pay down the debt if you don’t change your spending habits.  

Next up: We’re going to cover several ways to consolidate your debt and explain the pros and cons of each. 

4 ways to consolidate your debt — and the risks involved

Balance transfers:  

How they work. balance transfer is when you take a credit card balance and move it to a different card, usually one that you have just opened. Most consumers use a balance transfer because they’re relatively easy to do and because they find a credit card offering a lower interest rate than the one they aim to replace.

Many credit card companies have special promotions in which you can get a 0 percent introductory APR on balance transfers for a certain length of time, sometimes as long as 24 months. Because credit card interest can be in the double digits, transferring a balance to a card with no interest lets borrowers pay off their total debt much faster.  

For example, if you have a $5,000 balance on a credit card with 15% APR and you apply for a credit card with 0% intro APR for 24 months, you could transfer the balance and save $639.73 if you pay off the balance before the offer ends (making $250-a-month payments to accomplish that goal). 

However, there might be a fee you have to pay with a balance transfer, often set at  3-5 percent of the total balance. Do the math before you apply for a balance transfer offer. The money you will save on interest charges might outweigh the cost of the balance transfer fee.  

Risks. One of the risks of a balance transfer is that you might not actually pay off the balance before the balance transfer offer ends. This is dangerous because then you could  end up paying high interest fees on top of the balance transfer fee you already paid to start the ball rolling. 

Also, opening up a new credit card will usually ding your credit score and drag down the average age of your credit accounts (also a ding). If you’re applying for a mortgage or other significant loan, a new credit inquiry could hurt your chances of getting the best rate.  

Credit card companies can be ruthless when it comes to 0 percent balance transfer offers. If you miss a payment or are late, your special offer could end, and you could be switched to the regular, substantially higher APR. If you go through with a balance transfer, set up autopay, or check every month to make sure your payment has gone through on or before the due date. 

Personal loans 

How they work. A personal loan can be applied in a number of ways, such as paying off medical bills, funding a wedding or consolidating debt. It’s a fixed amount of money borrowed for a fixed amount of time. If you have a high credit score and a solid income, you may be able to qualify for a loan with a decent rate, which can make this a more affordable borrowing tool than, say, a high-interest credit card. On the other hand, people with poor credit may still qualify for a personal loan, but are likely to have to contend with much higher interest rates.  

Applying for a personal loan is easy. You can reach out to a local bank or credit union or apply online. Most lenders will give out personal loans up to $35,000 and will ask that they be repaid within three to five years. If you get approved for a personal loan, the bank will usually wire you the funds, and then you can use them for any purpose. 

Risks. A personal loan is often set up as a short-term loan. While this might help people pay off their debt expeditiously, the pitfall of a compressed timeline is the difficulty of staying on track.  There’s no point in getting a personal loan to consolidate your debt if you end up unable to repay your loans. 

HELOCs/HEL 

How they work. A home equity loan is when you borrow money from the equity you’ve built up in your property. You can use this money to start a business, remodel your house or, yes, pay off debt. There are two ways you can borrow this money, either with a home equity line of credit (HELOC) or a home equity loan.  

A HELOC is a line of credit you have access to for a certain period of time. You can withdraw money for a certain length of time and then enter a final repayment period, whereas a home equity loan means the bank gives you a lump sum that you then repay every month. The amount you can receive depends on how much the home is appraised for and how much you still owe. 

Many people prefer to take out a home equity loan or HELOC for debt consolidation purposes because interest rates are usually far lower than they would be on a different kind of loan. Unlike a personal loan or credit card balance transfer offer, a HELOC is backed by a piece of property that the bank can resell if you stop making your payments. For that reason, lenders are willing to give you a better deal than if you take out a loan that’s not secured by such collateral. 

Also, when you repay a home equity loan, you can usually deduct the interest on those payments. This gives you an advantage in taxes when it comes to consolidating. 

Risks. A home equity loan and a HELOC are, as we noted, backed by the home as collateral. If you fail to repay the home equity loan or HELOC, then the lender can seize the residence. In such circumstances, not only does your credit history take a hit, you also may have lost your biggest financial asset. 

If you lose your home due to foreclosure, your credit score will also likely tank, making it harder to purchase another house. These issues are all a huge reason why consumers should be careful about these particular options. 

Student loan consolidation (private and federal) 

How it works. If you have student loans through the federal government, you can either consolidate/refinance them through the Direct Consolidation Loan program or through a private lender. You won’t save any money on interest with the Direct Consolidation program, however, as the program determines your new interest rate by averaging the rates on your existing loans. But it can be helpful for borrowers juggling multiple student loan payments. 

If you’re looking to save on interest, then you may choose to refinance your loans with a private lender instead. To get the best refi offers, you’ll have to have great credit and a solid income. Check out MagnifyMoney’s list of the best student loan refinance companies out there. Like other forms of consolidation, refinancing your student loans will streamline your payments and make it easier to stay on top of what you owe. If you’re apt to forget payments, then consolidating several loans into one, with one payment, might help you avoid racking up late-payment fees. 

The risks. If you decide to consolidate your federal loans with a private lender, you will lose all the protections and benefits that come with federal loans, including deferment, forbearance and income-based repayment plans. Forgiveness options such as the Public Service Loan Forgiveness Program are also off the table if you consolidate your federal loans with private loans, even through federally guaranteed banks.  

Income-based plans are useful if you work in a low-paying field or have an unstable job. Most private loan servicers don’t provide these types of options, which makes it even more important to keep your federal loans where they are.  

Often, consolidating your student loans can mean that your monthly payment decreases as your payment term increases. Unless you’re actively paying more than the minimum every month, you’ll end up paying more in interest overall.

If you are wanting to know more to about the methods listed above as a way to consolidate debt, you can visit MagnifyMoney’s parent company LendingTree here.
 

Alternatives to debt consolidation   

If you’re having trouble managing your debt, refinancing your loans could be one solution. When you refinance, your hope is to secure a loan with more favorable terms, ideally a lower APR, but you may also refinance in order to get a loan with lower monthly payments.

The simplest way to take hold of your debt is to go over your expenses and compare them to your income. Are there any changes you can make to spend less money every month? Could you try to eat out less or take the bus to work? All those small substitutions will add up quickly and you can put the difference toward your loans. 

If you want to pay off your debt quickly and are afraid of consolidating, consider using the debt snowball approach, popularized by Dave Ramsey. This strategy recommends paying off the smallest balance first. Then, when that loan is extinguished, you’ll apply the monthly payment to the next-smallest balance, and so on, until all your debts are repaid. The snowball method can help you feel empowered, and not overwhelmed, in tackling your loans. 

If you’re truly having difficulty with your loans, you should consider talking to a bankruptcy attorney. That expert should be able to tell you if your situation is truly dire and if you should consider filing for Chapter 7 or 13. 

The bottom line 

Consolidating debt can make sense for the right person. If you’re already trying to pay off your debt quickly and want to minimize your interest fees, then consolidation could save you even more money and time. 

Before you sign up, however, look at the total amount of interest you’ll pay with your current loan terms compared with the terms of consolidation. Will you save money? Or will you just trade in smaller payments in exchange for more breathing room? 

If you see consolidating as one more way to extend your payments, then doing so won’t lead to debt payoff. Consider the pros and cons before you decide on debt consolidation — and be aware that it’s not a magic cure. 

Zina Kumok
Zina Kumok |

Zina Kumok is a writer at MagnifyMoney. You can email Zina here

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How to Choose the Right Type Of Debt Consolidation

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If you’re feeling buried by what you owe, debt consolidation could provide you with both immediate relief and a quicker path to debt-free.

Debt consolidation is the process of taking out a new loan and using that money to pay off your existing debt. It can help in a number of ways:

  • A lower interest rate could save you money and allow you to pay your debt off sooner
  • A longer repayment period could reduce your monthly payment
  • A single loan and single payment could be easier to manage than multiple loans

But debt consolidation isn’t without its potential pitfalls. First and foremost: Consolidating your debt doesn’t address the behavior that got you into trouble in the first place. If you’re in debt because of overspending, consolidating may actually exacerbate your problems by opening up new lines of credit that you can use to spend even more.

And every debt consolidation option has its own set of pros and cons that can make it a good fit or a bad one, depending on your circumstances.

This post explains all of those pros and cons. It should help you decide if debt consolidation is the right move for you, and, if so, which option is best.

Six Consolidation Options to Choose From

1. Credit card balance transfers

A credit card balance transfer is often the cheapest debt consolidation option, especially if you have excellent credit.

With this kind of transfer, you open a new credit card and transfer the balance on your existing card(s) to it. There is occasionally a small fee for the transfer, but if you have excellent credit, you can often complete the transfer for free and take advantage of 0 percent interest offers for anywhere from 12-21 months. None of the other debt consolidation options can match that interest rate.

There are some downsides, though:

  • You need a credit score of 700 or above to qualify for the best interest rate promotional periods.
  • Many cards charge fees of 3 to 5 percent on the amount that you transfer, which can eat into your savings.
  • Unless you cancel your old cards, you’re opening up additional borrowing capacity that can lead to even more credit card debt. Let’s put that another way: Now that you’ve paid off your old cards, you might be tempted to start using them again. (Don’t!)
  • If you don’t pay the loan back completely during the promotional period, your interest rate can subsequently soar. Some balance transfer cards also charge deferred interest, which can further increase the cost if you don’t pay your debt off in time.
  • This just isn’t for people with high levels of debt. Credit limits are relatively low compared with those tied to other debt consolidation options.

Given all of that, a credit card balance transfer is best for someone with excellent credit, relatively small amounts of debt and strong budgeting habits that will prevent them from adding to their burden by getting even further into debt.

2. Home equity/HELOCs

Home equity loans and home equity lines of credit (HELOCs) allow you to tap into the equity you’ve built in your home for any number of reasons, including to pay off some or all of your other debt.

The biggest benefit of this approach is that interest rates are still near all-time lows, giving you the opportunity to significantly reduce the cost of your debt. You may even be able to deduct your interest payments for tax purposes.

But again, there are perils. Here are some of the downsides to using a HELOC/home equity loan for debt consolidation:

  • Upfront processing fees. You need to watch out for upfront costs, which can eat into or even completely negate the impact of lowering your interest rate. You can run the numbers yourself here.
  • Long loan terms. You also need to be careful about extending your loan term. You might be able to reduce your monthly payment that way, but if you extend it too far, you could end up paying more interest overall. Home equity loans typically have terms of five to 15 years, while home equity lines of credit typically have 10-to-20-year repayment periods.
  • You could lose your home. Finally, you need to understand that these loans are secured by your home. Fail to make timely payments, and you put that home in jeopardy. This is why, though the interest rates are lower than with most other debt consolidation options, there’s also added risk.

Home equity loans and HELOCs are generally best for people who have built up significant equity in their home, can get a loan with minimal upfront costs, and either don’t have excellent credit or need to consolidate more debt than is possible with a simple balance transfer.

You can ask your current mortgage provider about taking out a home equity loan or line of credit. Also, compare offers at MagnifyMoney’s parent company, LendingTree, here and here.

3. Personal loans

Personal loans are unsecured loans, typically with terms of two to seven years. Interest rates typically range from 5 to 36 percent, depending on your credit score and the amount you borrow.

The advantage of a personal loan over a credit card balance transfer is that it’s easier to qualify. While you typically need a credit score of 700 for a balance transfer, you can get a personal loan with a credit score as low as 580. You can also qualify for larger loan amounts than the typical balance transfer.

And the big advantage over a home equity loan or line of credit is that the loan is not secured by your house. This means you can’t lose your home if you have trouble paying back the debt. You can also apply for and obtain a personal loan very quickly, often at a lower cost than a home equity loan or line of credit.

The biggest disadvantage is that your interest rate will likely be higher than either of those options. And if your credit score is low, you may not find a better interest rate than what you already have.

Generally, a personal loan is best for someone with a credit score between 600 and 700 who either doesn’t have home equity or doesn’t want to borrow against his or her home.

You can shop around for a personal loan at LendingTree here. It’s important to compare offers to get the best deal possible.

4. Banks and credit unions

In addition to shopping for a personal loan online, you can contact your local banks or credit unions to see what types of loan options offer.

This is more time-consuming than applying online, and it can be harder to compare a variety of loan options. But it may lead to a better interest rate, especially if you already have a good relationship with a local bank.

One strategy you might try: Get quotes online using a service like LendingTree’s, then take those quotes to the bank or credit union and give it a chance to do better.

This strategy is best for anyone who already has a good and lengthy banking relationship, particularly with a credit union. But if you’re going the personal-loan route, it’s worth looking into in any case.

You can find credit unions in your area here.

5. Borrowing from family or friends

If you’re lucky enough to have family members or friends who have ample assets and are happy to help, this could be the easiest and cheapest debt consolidation option.

With no credit check, no upfront fees and relatively lenient interest rate policies, this might seem like the best of all worlds.

Even so, there are some things to watch out for.

First: A loan fundamentally changes your relationship with the person from whom you borrow. No matter what terms you’re on now or how much you love and trust this person, borrowing money introduces the potential for the relationship to sour in a hurry.

Consequently, if you do want to go this route, you need to do it the right way.

Eric Rosenberg, the chief executive of Money Mola, an app that lets friends and family track loans and calculate interest, suggests creating a contract that outlines each party’s responsibilities, how much money will be borrowed, the timeline for repayment, the payment frequency and the interest rate. He also suggests using a spreadsheet to keep track of the payments made and the balance due.

And Neal Frankle, a certified financial planner and the founder of Credit Pilgrim, suggests adhering to the current guidelines for Applicable Federal Rate (AFR), which as of this writing require a minimum interest of 1.27 to 2.5 percent, depending on the length of the loan. Otherwise, you may have to explain yourself to the IRS and the person lending you the money could be charged imputed interest and have to pay additional taxes.

If you have a family member or a friend who is both willing and able to lend you money, and if your credit isn’t strong enough to qualify favorably for one of the other options above, this could be a quick and inexpensive way to consolidate your debt.

6. Retirement accounts

Employer retirement plans like 401(k)s and 403(b)s often have provisions that allow you to borrow from the accumulated sums, with repayment of the loan going right back into your account.

And while you can’t borrow from an IRA, you can withdraw up to the amount you’ve contributed to a Roth IRA at any time without penalties or taxes, and you can withdraw money from a traditional IRA early if you’re willing to pay both taxes and a 10 percent penalty (with a few exceptions).

The biggest advantage of taking the money out of a retirement account is that there is no credit check. You can get the money quickly, no matter what your credit history looks like. And with a 401(k) or 403(b), you are also paying interest back to yourself rather than giving it to a lender.

Still, while there are situations in which borrowing from an employer plan can make sense, most financial experts agree that this should be considered a last-resort debt consolidation option.

One reason is simply this: Your current debt is already hindering your ability to save for the future, while taking money out of these accounts will only exacerbate the problem. Another is that tapping a retirement account now may increase the odds that it will happen again.

“I’d stay away from a 401(k) loan like the plague,” says Ryan McPherson. McPherson, based in Atlanta, Ga., is a certified financial planner and fee-only financial planner and the founder of Intelligent Worth. “With no underwriting process, and because you’re not securing it with your house, you’re more likely to do it again in the future.”

If you are in dire straits and cannot use any of the other strategies above, then borrowing or withdrawing from a retirement account may be the only consolidation option you have. Otherwise, you are likely to be better off going another route.

Things to consider before picking a debt consolidation strategy

With all these debt consolidation options at your disposal, how do you choose the right one for your situation? To be sure, it’s a key decision: The right option will make it easier for you to pay your obligations, and less likely that you’ll fall back into debt.

Here are the biggest variables you should consider before making the choice:

  1. Have you fixed the cause of the debt? Until you’ve addressed the root cause of your debt, how can any consolidation option help you get and stay out of debt?
  2. How much debt do you have? Smaller debts can be handled through any of these options. Larger debts might rule out balance transfers or borrowing from relatives or friends.
  3. What are your interest rates? You need to be able to compare your current interest rates with the interest rates you’re offered by the options above, if you want to know whether you’re getting a good deal.
  4. What is your credit score? Your score determines eligibility for various debt consolidation options, as well as the quality of the offers you’ll receive. You can check your credit score here.
  5. When do you want to be debt-free? Shorter repayment periods will cost less but require a higher monthly payment. Longer repayment periods will cost more but with a lower monthly payment. With this in mind, you need to decide both what you want and what you can afford.
  6. Do you have home equity? This determines whether a home equity loan or line of credit is an option. If it is, you should decide if you’re comfortable putting your home on the line.
  7. Do you have savings? Could you use some of your savings, outside of retirement accounts, to pay off some or all of your debt? That may allow you to avoid debt consolidation altogether and save yourself some money.

So … what’s the best consolidation strategy?

Unfortunately, there is no single answer to this tough question. The right answer for you depends the specifics of the situation.

Your job is to know what you currently owe and understand the pros and cons of each option we’ve outlined above. In this fashion, you can make an informed choice, one that’ll get you out of debt now and keep you out of it forever.

Matt Becker
Matt Becker |

Matt Becker is a writer at MagnifyMoney. You can email Matt at matt@magnifymoney.com

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Best Debt Consolidation Personal Loans

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Best Debt Consolidation Personal Loans

Are you stuck under an overwhelming pile of consumer debt? Do you feel like it might be impossible to get out? Fortunately there are tools that can help you get out of debt faster.

A debt consolidation personal loan could be a good answer. With a personal loan, you would use the loan proceeds to pay off credit card debt, medical debt or any other form of debt. You would then have a loan at a fixed interest rate and a fixed term.

Debt consolidation provides three benefits:

  1. Make payments simple: If you owe a lot of lenders and are having a tough time keeping track of all the payments, then consolidating will make your life easier. You’ll only owe one lender and have to keep track of one due date. There’s less of a chance of anything falling through the tracks.
  2. Lower your interest rate: This is where you have to run the numbers to see if debt consolidation makes sense for you. What’s the average interest rate you’re paying on your debt? If it’s quite high (which is likely if you have a lot of consumer debt), you may benefit from consolidating under better terms. Just remember to only use a personal loan if the interest rate is lower than the one you are already paying.
  3. Improve your credit score: If your credit cards are currently maxed out, your credit score will suffer. When you pay off your credit card debt with a personal loan, you will often receive a boost to your credit score, so long as you don’t start using your cards again. LendingClub did a study and determined that there is an average score increase of 21 points within three months for people who use loans to eliminate credit card debt.

If you think debt consolidation makes sense for your situation, we have a list of the best debt consolidation loans you can use to refinance your consumer debt. Read on for our recommendations.

Personal Loans to Consolidate Credit Card Debt

Start Shopping Here – LendingTree

At LendingTree, you can make dozens of personal loan companies compete for your business with a single online form. When you fill out the form, LendingTree will do a soft credit pull – which means your score will not be negatively impacted. Dozens of lenders will compete and you may be matched with lenders who want your business. You may be able to compare and save in just a few minutes. We recommend starting here. You can always apply directly to other lenders – but many of the lenders we recommend already participate in the LendingTree personal loan application tool. (Note: LendingTree owns MagnifyMoney)

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Below are some leading lenders you could also consider:

SoFi – Excellent Credit Required

You can borrow between $5,000 and $100,000, which is the most out of the personal loans recommended here. The fixed APR ranges from 5.49% – 14.24% if enrolled in autopay. You can choose a term of up to 7 years. Variable interest rates range from 5.29% – 11.44% APR. Although SoFi does not use FICO, you need to be “prime” or “super-prime” to qualify. That means you must be current on all of your obligations and must never have filed for bankruptcy. There is no origination fee or prepayment penalty associated with a personal loan from SoFi.

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Some of the leading lenders for people with less than perfect credit include:

LendingClub – Minimum FICO of 600

This is a peer-to-peer platform, which means individual investors are contributing to your loan. You can borrow between $1,000 and $40,000 with LendingClub, and its APR ranges from 5.99% – 35.89%, depending on the type of loan grade you’re eligible for. Be aware there are origination fees (ranging from 1% – 6%) associated with this personal loan, but there are no prepayment penalties. You can borrow on terms up to 5 years. The minimum credit score needed is 600. LendingClub is not available in Iowa or West Virginia.

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Prosper – Minimum FICO of 640

Prosper offers loans from $2,000 to $35,000, and APR ranges from 5.99% to 36.00%. It offers loans terms of either 36 or 60 months. Your APR is determined during the application process, and is based on a credit rating score created by Prosper. Your score is then shown with your loan listing to give potential lenders an idea of your creditworthiness. Origination fees range from 1% to 5% and are based on your Prosper score. In order to qualify, you must:

Prosper is a flexible alternative with a low-end APR that usually beats a credit card.

[Check out other Personal Loans on Our Comparison Table Here]

A Loan or a Credit Card to Consolidate Debt?

Personal loans can be an excellent way to consolidate your debt. Personal loans are best when you have a lot of debt or your credit score isn’t perfect. However, if you have a smaller amount of debt and a great credit score, you can get rates as low as 0% with a balance transfer. If you do have a good credit score, you should apply for a 0% interest balance transfer credit card.

Wait: I Have Student Loan Debt

If you’re thinking about refinancing or consolidating your student loans, there are a couple of things to know.

First, what’s the difference between refinancing and consolidating?

  • Private Loan Consolidation: This involves combining all your loans into one loan so you only owe one lender and have to make one simple payment.
  • Federal Loan Consolidation (Direct Consolidation Loan): Only have Federal student loans? You can combine them through a Direct Consolidation Loan with the government. According to studentaid.ed.gov, “The fixed rate is based on the weighted average of the interest rates on the loans being consolidated.” This doesn’t save you much money, but your payments will be more manageable. For a complete list of Federal loans that can be consolidated, check here.
  • Refinancing: This is when you apply to a completely new lender for new terms – you’ll have a new loan, and your new lender will pay off your old loan.

The difference isn’t all that big – when you consolidate private (or private and Federal) student loans, you’re essentially going through the refinancing process.

If you currently have Federal loans, you need to be aware refinancing or consolidating means giving up certain benefits that come with federal student loans.

That means income based repayment, deferment, forgiveness, and forbearance options disappear. A few of these benefits are forfeited even with the Direct Consolidation Loan. These benefits could get you through an otherwise rough time, so make sure refinancing makes sense beforehand.

If you do have federal student loans, and you’re thinking of refinancing or consolidating, first see if you’re eligible for deferment or forbearance. There’s no reason to go through the process of having your credit checked if you can lessen your student loan burden another way.

If you have private student loans, you can also check with your lender to see if it offers payment assistance. Many lenders are making improvements to their student loan refinance programs and including forbearance and deferment options.

Also, once you consolidate or refinance your student loans, there’s no going back. This applies to the Direct Consolidation Loan as well.

Okay, still think refinancing or consolidating is right for you? You can shop for the best lender to refinance your student loans here.

Shopping Around is a Must When Consolidating or Refinancing

The goal of refinancing or consolidating is to ultimately make your debt less of a burden on you. That means getting the best rates and terms offered. The easiest way to accomplish this is to shop around with different lenders. If you do so within a 45-day window, FICO will not punish you for shopping around. All of your student loan inquiries in the 45-day period will only count as one inquiry. Plus, there are many lenders out there who will give you rates with just a soft credit inquiry (though a hard inquiry is required to move forward with a loan). Always put yourself first, as you’re never obligated to sign for a loan you’re approved for.

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Erin Millard
Erin Millard |

Erin Millard is a writer at MagnifyMoney. You can email Erin at erinm@magnifymoney.com

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The Dangers of Debt Solutions

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Depressed man slumped on the desk with his hands holding credit card and currency

If you are in debt and it feels like it is getting out of control, you may be at a point where you are ready to reach out for help. If you do, use caution and common sense. There are some upstanding companies looking to help you, and some predators looking to take advantage.

What Debt Solutions Companies Offer

Debt solutions companies exist to help you manage your debt and get out from difficult debt situations. Many people find themselves struggling to make ends meet after paying credit cards, student loans, and medical debts, and a debt solutions company may be able to help reduce, eliminate, or consolidate some payments to save cash each payday and save money in the long run.

Quality debt solutions companies will help customers understand and evaluate their debt, income, and expenses and use that information to plan a series of steps to remove the burdens of the debts through a combination of budgeting and debt payoff.

In some circumstances, if the debt load is beyond your ability to pay, the company will suggest debt consolidation or debt forgiveness to help you get out of debt. These options have serious ramifications to your credit, so they should never be taken lightly.

Debt consolidation is taking out a new loan to pay off existing loan balances. Credit cards generally have very high interest rates, typically over 20% per year, and consolidating outstanding debts to a lower interest loan can help simplify payments and save money. However, people with high revolving debt balances may have trouble qualifying for lower interest consolidation loans, so this is not always an available option.

Debt forgiveness is another option, and a near last resort for people with a serious problem managing their debt. In this case, a debt solutions company will reach out to lenders to ask for a reduction in outstanding debt balances in exchange for a lump payment or lower monthly payments. When a lender agrees to this, the account will show that a settlement was reached on your credit report, which will hinder your ability to receive new credit for seven years or more. In this case, borrowers may receive a debt reduction of 50%-60%.

As a last resort, some borrowers file for bankruptcy protection. Bankruptcy courts can lower or eliminate debt balances, but a bankruptcy leaves a bad mark on your credit report for ten years and may disqualify someone from any new credit or debt, such as a mortgage loan to buy a home.

What to Look For

If you are in a situation where you could benefit from the services of a debt solutions company, it is important to hire a company that will put your best interest first and stand by you as you work to get debt free.

First, any interaction with the company should leave you feeling like you are making the right steps. If you are being pressured to do something that makes you uncomfortable, you are not working with the right company for your needs. A debt solutions company should treat you with respect as you work through your difficult situation. They should not add more stress on top of your already stressful time.

Debt solutions and debt settlement companies offer a variety of fee structures. When choosing a company, the fees should be very clear and easy to understand. Do not agree to anything you do not understand or ambiguous.

Also look for online reviews. You can look to the Better Business Bureau to see if the company is highly rated or riddled with negative comments and complaints.

Warning Signs

While there are good debt solutions companies out there, the industry has garnered a bad reputation thanks to the many predatory agencies looking to profit from American’s bad fortunes. Here are some red flags to lookout for when choosing a debt solutions company.

  • Pushing for bankruptcy – If the first thing that happens out the gate when you speak to the company is a push towards bankruptcy, take a step back and evaluate if this company truly has your best interest in mind. Bankruptcy is the right choice in some situations, but should never be the first option discussed and you should never be pressured into doing so quickly.
  • Quick fix solutions – There is no quick fix to debt problems. Outside of medical bills, people rarely get into crippling debt quickly, and it takes time to get out of debt too.
  • High pressure – Your debt solutions company is not a used car lot. If you feel like you are being pitched by a seedy car salesman, take your business elsewhere.
  • Unclear fees – You should know and understand up front exactly what you will expect to pay for debt solutions services. If the fees seem high, call around to a few companies to compare.
  • Bad reviews – Companies get bad reviews even with the best of intentions from time to time, but a trend of more bad reviews than good ones shows that more people have had negative experiences than positive ones.

Try to Solve It Yourself First

Before you look for help solving your debt situation, look in the mirror and you will find the number one advocate that will help you get out of debt. You care more about your situation than any business, so put in the work to get yourself on track to getting out of debt before calling for help.

If you have higher monthly expenses than your income, look at your spending habits and get on a budget that leaves room for debt payments.

If you have several high interest rate loans, look for consolidation options on your own through a personal loan.

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Eric Rosenberg |

Eric Rosenberg is a writer at MagnifyMoney. You can email Eric at eric@magnifymoney.com

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