When experts talk about debt rising at an absurd rate in the US, they are not only talking about government debt but also about how the Average American has five different types of loans and credit cards to pay every month.
Because of this, many individuals are now paying close attention to debt refinancing and consolidation, the idea is to simplify the existing payment structure into just one single piece of debt. Allowing for easier management, cheaper interest rates, and an overall smaller payment every month. While on paper it sounds like a no brainer, in reality, a debt consolidation process is more complex, without the proper planning and management you can easily end up in a much worse position than prior.
Not two individuals are the same, this is the main reason why analysis and proper review is needed to determine the viability of pursuing a debt consolidation processor not.
While debt consolidation might help improve someone’s life and its financial situation, in reality, if an individual decides to keep their old spending habits it will all fall back to square one. With a debt consolidation loan, you are given the opportunity to have a relatively fresh start and to finish paying your debt. Do not commit the capital sin of putting yourself back in the pit by overspending and misusing your credit cards and credit lines.
Keep in mind that debt consolidation will not make your current debt go away, instead, it will simply be wrapping it in a better and easier to pay presentation. Do not let this become a problem like your previous debt become, doing so can result in a totallying your credit score and stealing your peace once again. The problem is that this time you won’t be offered a lifeline. You should also consider that there are multiple other options that might be a better suit for your situation than simply consolidating debt, it is recommended for you to talk with a financial advisor to know all your options before committing to a debt consolidation or a refinancing.
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What are the Pros and Cons of Consolidating Debt?
Note: If used properly a debt consolidation strategy can save your credit score and your mental health, but if you don’t change your habits and how you manage your personal finances you will be doom to fall into problems once more. You cant continue doing the same things and expecting a different result every single time. The problem here is that for most individuals you won’t get a second time when it comes to borrowing or even consolidating for that matter. You have already dealt with the mental pain of getting calls every day asking for their money and the constant harassment it can cause, it is now your turn to decide how you want to play this new hand that has been given to you. Play it wisely.
Key Terms That You Should Know
1. Debt Management
Debt management is probably one of the best options for individuals who are not interested in consolidating their debt. Under this structure, the borrower and the lender will try to reconcile the situation by changing the terms of the debtor by simply allowing for space for the borrower to repay.
While it can be done in-house by both lender and borrower, certain individuals prefer to get a credit counselor to set up a payment method and to act as a mediator between the two parts. If you want to keep debt as is and only change the basics of the contract without having to fully refinance then it might be your go-to option.
Please take into consideration that if you decide to go with a counselor you might have to pay for it out of your pocket. It is almost unheard to see institutions covering these expenses or even a portion of them. You should do your due diligence to understand if it is even worthy in the first place to pay someone rather than just going for another alternative.
2. Debt Consolidation
In synthesis debt consolidation is very simple and straightforward. With this model, you would be getting a new personal loan for the amount of money to currently owe. This money will cover 100% of your current debt, leaving you with a fully new balance in one single account. Most financial institutions will allow payments to cover up to 10 different debt issuers as part of your consolidation plan.
Take into consideration that with this model you will be technically financing the owed interest rates from the previous debt. This is probably one of the big problems many experts have when it comes to debt consolidation. Having to borrow to pay interest is probably one of the red flags that many financial advisors have.
Keep in mind that no two individuals are the same, this also applies to their debt. You should take your time to review and understand the implications of consolidating debt and also from not doing it. How your credit will be affected later in time and most important if you are in the capacity of being able to repay the new loan or not.
3. Debt Settlement
If you have already defaulted on your debt or simply if it close to get to that point most lenders will be willing to negotiate a smaller amount than you actually owe just to get something out it. If you are in this position then your credit score has already taken the fall for your problems. It might be a good option to reach to your lender and as for a debt settlement.
At this point, most institutions might offer you to pay only for the principal owed without having to pay for any interest compound or the penalties. Take into consideration that this should only be the last resort and not the intended way out. If your debt passes the point of being settled the only remaining action from the lender will be legal.
If your lender is playing ball and is interested in finding a middle ground for you to pay, the best advice I can give you is to receive all the documentation and communications in paper or at least in digital format. There are horror stories of institutions stepping from their deals after the first payment was done. It is better to have everything to protect yourself.
Even if it sounds counter-intuitive but even if it means that you are dealing with a reputable financial institution, you should always react in a way where you are expecting them not to honor their part. If you have the documents and the offer in hand it will be better for you to defend yourself later in case something falls down in the middle of the negotiation.
Best Consolidation Providers in 2021
1. Marcus by Goldman Sachs – Best Overall
Marcus is the retail banking unit of the wall street titan Goldman Sachs. Over the years their operations have become more focused on personal loans and debt consolidation. Without a doubt, this has to be one if not the very best option available in the market.
Take into consideration that even though the firm allows individuals with a relatively “OK” credit score, it might not accept individuals with red flags like bankruptcy or extensive record of defaults.
An important key to mention is that this firm offers a fully online model, this allows individuals to fill their loan applications online and without having to leave their homes.
- 5.99% – 28.99% Variable (Autopay Discount Available)
Loan Amount: $3,500 to $40,000
Length: 36 to 72 Months (3 – 5 Years)
Minimum Credit Score: 600 FICO
Minimum Annual Income: $40,000
- Fast Approval: Analyzing a debt consolidation loan can easily take days if not weeks, or at least this is what it used to take in the traditional banking system. With the rise of online banking, artificial intelligence and algorithms, it possible for institutions to go over hundreds of complex applications in just hours. Marcus offers a 24-hour approval process, making the entire process fast and straightforward.
- Flexibility: It is good to know that you are doing business with a firm that understands all the different aspects of life and that things can happen unexpectedly. Marcus is a firm that is known for allowing individuals to adjust their payments in moments of distress. Another good aspect of this is that once a year yo receive the opportunity to differ the payment of one month, this permits individuals to use the money for something else without being penalized.
- The consolidation products offered by Marcus by Goldman Sachs are probably the overall best option in the market in 2021. There are not many complain about the brand and their service besides small things like their online platform or their lack of products for self-employed individuals. If you are in need of a consolidated loan you should consider Marcus by GS as your number one choice.
2. One Main Financial – Best For Damaged Credit
If you are already in trouble with your debt and your credit score, the number of options available in the market gets cut un more than 90%, but you should take into consideration that there are certain firms willing to lend you…. even with a bad credit score.
OneMain Financial is one of the only firms in the market that is willing to take the high risk of offering their consolidating products to individuals with a history of defaults and also regular bad credit. It is important to keep in mind that even though the firm is willing to ignore your credit score, the interest rate offered will certainly take it into consideration. One of the biggest complains that most individuals with credit in bad shape usually talk about is the fact that everything becomes more expensive. The result of this is that it is very difficult for an individual to be able to get of debt and subsequently the cycle continues.
If you have dented your credit score in the past you might want to look for firms like OneMain Financial as the only option in the market that will help you consolidate your debt without taking your soul as collateral. It is important to stay away from firms with a track record, the market is full of sketchy companies offering this type of products with the sole intention of committing fraud and stealing from the users.
- 16.05% – 35.99% Variable (Autopay Discount Available)
Loan Amount: $1,500 to $30,000
Length: 2 – 5 Years
Minimum Credit Score: 500 FICO
- Bad Credit Score: If you have a credit score un 600 the options in terms of borrowing will decrease considerably. It is incredibly good to know that there are still some companies willing to take a higher risk by allowing a second or third chance to individuals in need.
- Fast Funding: Once everything has been signed and approved you can expect your creditors to get paid in less than 24 hours, this is a great option for anyone who is corned and really needs to get the consolidation in place as soon as possible.
- In Person Process: While you can request consolidations online, in order to finalize the process you will have to visit a branch and sign all the papers there. This might be a complication for individuals that do not have a branch in their states or that is simply not convenient.
- High APR: As a result of lending to individuals with a bad credit it is expected to pay a higher and most expensive interest rate than a traditional consolidation of debt, having said so you will be surprised by how expensive it can be to deal with this firm. On average you can expect to pay up to 30% more than a traditional institution.
3. Discover | Best For Individuals with an “ok” Credit Score
Chances are that you know Discover for their credit and debit card network, but many fail to recognize the brand as one of the largest and important Online Banks in the US. Over the years the infrastructure utilized for the payment mechanisms were also adapted to serve as a fully operational bank.
In this list, Discover falls into the “ok” category, not because of their service but because of who they are targeted for. This is an option that is in between the two major categories in terms of credit scores, right in the middle where individuals are relatively ok but not well enough to consider credit material in no matter.
With the Average American having a credit score of 600 it is easy to see why these types of options are thought after by so many individuals. Keep in mind that you are not alone and that in most cases Americans have on average $15,600 of credit card debt alone, this is also one of the major catalysts for individuals to consolidate debt.
If you are worried of all the scams of this sector, and you want to do business with a reputable name I genuinly advise to take a look in Discover. It might not be the number one option for many, but it is certainly an option that will deliver time after time.
- 6.99% to 24.99% APR Variable (Autopay Discount Available)
Loan Amount: $2,500 to $35,000
Length: 3 – 7 Years
Minimum Credit Score: 620 FICO
- Transparency: In the history of the world banks have been known for taking advantage of individuals by addving fine print to the contracts. With Discover, you can be certain that you are doing business with a firm that cares about their reputation and that will be open about all the details for the transaction. Take your time to understand and to ask all the necessary questions before deciding which consolidating plan to take, this will ensure that you will be on the same page with the lender and that all expectations are being managed accordingly.
- Testimonials: In a world where yelp dominates the reviews for almost everything, it is great to see that a financial institution is able to get such a good scoring. It is fairly common to read great comments and stories about Discover, making it one of the best-ranked institutions currently in the market. It is always heartwarming to see individuals talking positively about their experience before you diving or committing with one of their products.
- Low Cap: While $35,000 might be enough for most individuals, it is important to mention that once you consider the average amount owed in credit cards by Americans and also all the other types of debt commonly owed as well, the number might not be enough for a great majority of the borrowers.
- Customer Service: Dealing with an online bank means that you will have to constantly deal with customer service and their atrocious service. Keep in ming that you might have to take some off time to deal with long calls in case something fails with the online form or simply to review an existing situation.
4. Sofi | Best For High Earners
ust like we have companies that target individuals with bad credit or in a certain type of social class, names like Sofi are known for offering their products to well off individuals. The firm is probably one of the overall best options from this list if you have the credit score and also the means to qualify for one of their products. When it comes to personal loans and debt consolidating, SoFi is a name regularly associated with exclusivity.
Exclusivity comes with a lot of benefits, one of them being the fact that this is probably one of the most flexible firms in the market. A late payment, don’t worry you won’t get a late fee, needing to defer payment for one month, done… the firm will cover your back. This is one of those scenarios where having a good credit score becomes tangible, most of the time the benefits are behind the scenes but here it is easy to see why you should take care of your score.
If you are eligible in terms of Income and also credit score, you should consider SoFi over any other firm in the market. Just like an American Express card is full of their own benefits and pluses, the same happens here. It is great to know that you are doing business with a company that will cover your back and that will take care of you as a prime guest.
- Fixed: 5.99% – 16.24% (With Autopay)
- Variable: 5.74% – 14.70% (With Autopay)
Loan Amount: $5000 to $100,000
Length: 2 – 7 Years
Minimum Credit Score: 680 FICO
- Unemployment Protection: One of the worst uncertainties in life is to get a loan or simply to get in debt and to depend on an employer. Life is dynamic and things can change really fast, it is great to always know that you will be covered in case an event happens and your job is taken away. While this won’t last forever, it is still a great benefit to be protected for a considerable period of time.
- Low Rates: Since the individuals who apply in SoFi have a considerably high credit score, the average interest rate charged is lower than the average in the country. This is another great option that proves how a credit score can save you money.
- High Credit Score and Income Requirements: Exclusivity is not available for the masses, this is the main principle that is utilized by the firm. Instead of aiming to get 1000 customers with a relatively good credit score, the firm focuses on getting the top 20 and then filtering them out by income. This allows for their products to remain accessible only to high-class individuals.
- Does not Offer Secured Loans: The firm focuses on offering only unsecured loans, if you were planning on using your car, house or securities as collateral you might want to look for a different option.
5. Avant | Alternative Option for Damaged Credit Scores
Avant Credit is one of the few firms that are focused solely on offering their products to high-risk individuals, making this a company with a considerably large appetite in terms of risk. According to the Chicago Based firm, the main target of the company is the typical middle-class American, hard-working individuals who are in need of a little boost in their life.
It is important to mention that individuals in this category should be extremely careful as there are many firms that are trying to take advantage of individuals in need. If you have ever believed that banks are greedy, wait until you see the financial institutions that specialize in high-risk lending.
Take into consideration that this is a firm that excels in terms of debt consolidation and also for emergencies when cash is needed and a personal loan might be the safest way out.
- 9.95% – 35.99% Variable (Autopay Discount Available)
Loan Amount: $2,000 to $35,000
Length: 2 – 5 Years
Minimum Credit Score: 580 FICO
- Available Nationwide: Many individuals have to deal with the frustration of seeing offers of great firms and latter finding out that they are not eligible because of the state that they live in. With Avant, you can be certain that you will always be eligible as the firm offer their services in all states.
- Lightning Fast Funding: If the application gets approved early in the day, you can easily get the funds deposited in your account or paid directly to your lenders on the same day. Avant offers one of the fastest funding processes currently available in the market.
- Strick Payment Schedule: When Avant tells you that your payment must have been done on the 15 of each month, it means that by 11:59 of the same day the money should have been sent. While other firms allow for one or two days for payments and checks to be processed, Avant will not forgive one single day. This means that after the date has passed you should add an extra penalty of $25 for every additional day. According to the firm, the idea behind doing this is to ensure that individuals are truly committed to their payments and will do all they can to avoid these additional fees.
- Higher than advertised Interest Rates: Publicity can be misleading and with Avant, it tends to be the norm. Take into consideration that this is a firm that spends large sums of money on marketing campaigns and online ads. It can be frustrating to see low-interest rates being advertised only to find that the firm will say any type of excuses as to why you are getting a different quote. This is probably one of the main reasons why individuals usually feel uncomfortable with the firm and decide to look somewhere else.
Receiving constant calls and emails from creditors are probably one of the worst situations that most Americans have to deal with. Not only it is painful but it is also very heartbreaking and depressing. Being in debt is not easy, and many individuals look after debt consolidation in an effort to make things better or to make them bearable and livable.
As mentioned before, it is incredibly important to be objective and to understand the reasons why you want to consolidate in the first place. Chances are there are other alternatives you have not considered yet, or maybe it is the best possible option. My point is that before making any decision out of pure emotion and stress, you should do your research. This will ensure that you won’t regret your decision a year from now.
If used properly a debt consolidation loan can be your best friend, it can save you money, simplify your finances, and help you breathe in moments where you needed it the most.
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Glossary of Loan Terms
Can Debt Consolidation help me save money?
The two main reasons why so many individual looks to consolidate their existing debt is to The main reason why so many individuals look to consolidate their existing debt is to save money. Maybe you choose a personal loan with a variable interest rate and now rates are rising, or you have credit card debt that is asphyxiating you. By choosing a new consolidated loan you will be able to refinance your existing debt under new conditions. The whole idea behind doing this is to get you conditions that will save you money, meaning that you will pay less or to spread the loan in a way that your payments will be smaller. Before making any decision it is incredibly important for you to take your time and review all the pros and cons of consolidating debt. In most cases financial institutions will not allow you to refinance an already consolidated loan in at least 3 years, this means that you need to be 100% sure before committing. Otherwise, you can actually put yourself in a bad situation once more.
What are the risks of consolidating debt?
Collateral: Before deciding to choose between a secured or an unsecured loan you need to understand that if you default on your payments the collateral will cover for the loan. This also means that it will be taken from you. Just like defaulting on a mortgage will cause you to lose your house, the same applies to whatever type of collateral you will be giving. You need to understand if you are willing to take the risk of losing your house or even your 401K if you are using money as collateral. If a default occurs you might end up in a deeper hole that you were before.
Paying debt to get into more debt: A consolidated loan will always be larger than the first loans, the reason for this is that you are not only paying for the principal of the initial loans but also their entire interest base. This means that you are actually borrowing money to pay interest, and now you will have to pay interest on those interests as well. It might sound complicated but in synthesis, you should never borrow money to pay for interests, this is just a perfect example of how to complicate your life.
My credit is not good, is there any way to consolidate debt?
This is probably the most common question in terms of debt refinancing or simply borrowing. In reality, many companies have shifted their approach in order to offer products and options to individuals who have damaged their credit score. It is important to understand that while you might be eligible and approved by such firms, it won't be cheap. Since your credit score defines who risky it is for a financial institution to lend you money, you will be treated as a high-risk individual. This means that if they actually want to lend you money, they will do so at the highest and most expensive interest rate they possibly can. It is critical for you to understand the implications of refinancing under such a pricey interest rate, and also to take into consideration the fact that debt consolidation might not be the best option all the time. Take your time reviewing all the available options in the market before making a final decision.
Does Debt Consolidation affects negatively your credit score?
The market is full of disbelief and ignorance when it comes to what really affects your credit score and what doesn't. While actions like a bankruptcy or a default will leave a stain for many years in your credit score, debt consolidation actually acts as a neutral entry in the score. Once it has been processed and all the existing debt gets paid, the only remaining should be the new loan. It is at this moment where you have to do whatever is close to your hands to actually pay for the loan in full and on time. This will help you like no other thing to actually be able to get an improve credit score. Take into consideration the fact that credit scores are not static, and as living beings, they are always changing. Having a bad credit score can always be changed, the only one stopping you from achieving your financial goals is YOU!
Secured vs Unsecured Debt Consolidation Loans ?
Secured and Unsecured loans offer a very different range of pros and cons each, in order to analyze what's the best option it is important to understand your position. If you are an individual with a good credit score and you just simply want to consolidate in an effort of having one single payment every month then an unsecured loan would be just fine. The moment you get a secured loan you are adding a new ingredient to this formula, collateral. This means that the entire loan is not less risky for the lender and most likely the interest rate given will be more forgiving. You can not say that one is better than the other, as they are two completely different types of borrowing. Take your time to understand your credit score and where you will be landing in the balance of the institution you are requesting the consolidation with. This will help you determine which way is actually going to be the best for your credit profile. Also, take into consideration that for a secured loan you will need to have some sort of collateral, this can be cash, securities, properties or even a vehicle.
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