It can be easy to fall into debt, especially if you tend to overspend or you have to pay for necessities with a credit card. But getting out of debt is much harder when interest rates are astronomical and you don't have anything extra to throw at them.
If you're stuck with multiple high-interest bills, a debt consolidation loan can help you start making some progress. But it's not without it's drawbacks
Offers in this section are from affiliate partners and selected based on a combination of engagement, product relevance, compensation, and consistent availability.
According to National Debt Relief, clients who complete its debt settlement plan can reduce their enrolled debt by an average of 20% to 25%, after fees.
Freedom Debt Relief has resolved over $20 billion in outstanding debts since 2002. It offers free credit card debt relief consultations.
How debt consolidation works
A debt consolidation loan allows you to pay off several high-interest debts, like credit card bills, and replace it with one lower-rate personal loan. Not only will it save you money on interest, but you only have one debt a month to keep track of, rather than several.
If you're approved, lenders will typically pay your creditors directly, asking for their information and the amount you wish to send to each. You would need to repay the loan with fixed monthly payments over a specified timeline.
Like any loan, you'll be charged interest. Typically, your interest payments are calculated into your monthly payment and divided over the lifetime of the loan, with most loan terms ranging anywhere from six months to seven years. The longer the term, the lower your monthly payment will be. You'll be charged more interest over time, though, so elect for the shortest term you can afford.
Some lenders also charge an application or origination fee, but there are several no-fee options with varying interest rates available, depending on your credit score.
Pros and cons of debt consolidation loans
Pros
- Multiple debts can be streamlined into one monthly bill
- You could save money if you qualify for a lower rate than a credit card
- Your lender may pay your creditors directly
- You can improve your credit score by having fewer outstanding balances
Cons
- If you have bad credit, you might not qualify for a good interest rate.
- You may be tempted to run up more debt as you lower your balance
- The origination fee could eat up any savings you get from a lower interest loan
Alternatives to debt consolidation
While a personal loan can help get out of the red, it's not the only option.
Home equity
You can use your home equity, or the percentage of your house you own outright, as leverage to get cash. Rates for home equity loans and home equity lines of credit (HELOCS) are significantly lower than credit cards, and you have a lot longer to repay the total.
On the other hand, the loan is now tied to your house and you could be foreclosed on if you default.
Other financial products that use home equity to generate cash are reverse mortgages and a home equity sharing agreement.
Offers in this section are from affiliate partners and selected based on a combination of engagement, product relevance, compensation, and consistent availability.
15 to 30 years
500
25%
10, 15 or 20 years
680
20%
0% intro APR credit card
You might consider transferring your balance to a 0% intro APR balance transfer credit card to press pause on interest for a specific amount of time. Free from the burden of interest payments, you should aggressively pay down your debt's principal before the interest-free period ends. Two of the best cards to use for this strategy include the Citi Simplicity® Card and the Wells Fargo Reflect® Card.
The Citi Simplicity® Card may not earn rewards, but it can still save you money due to its amazing intro-APR offers.
- One of the longest intro APR offers for balance transfers
- No annual fee
- No rewards
- No welcome bonus
The Wells Fargo Reflect® Card can help you save on interest charges thanks to its extra generous intro-APR offer on purchases and qualifying balance transfers.
- Best-in-class intro-APR for purchases and qualifying balance transfers
- No annual fee
- Cell phone insurance: up to $600 of cell phone protection against damage or theft. Subject to a $25 deductible
- No rewards
- No welcome bonus
- High balance transfer fee
Highlights
Highlights shown here are provided by the issuer and have not been reviewed by CNBC Select's editorial staff.
- Apply Now to take advantage of this offer and learn more about product features, terms and conditions.
- 0% intro APR for 21 months from account opening on purchases and qualifying balance transfers. 17.49%, 23.99%, or 28.24% variable APR thereafter; balance transfers made within 120 days qualify for the intro rate, BT fee of 5%, min: $5.
- $0 annual fee.
- Up to $600 of cell phone protection against damage or theft. Subject to a $25 deductible.
- Through My Wells Fargo Deals, you can get access to personalized deals from a variety of merchants. It's an easy way to earn cash back as an account credit when you shop, dine, or enjoy an experience simply by using an eligible Wells Fargo credit card.
Balance transfer fee
5%, min: $5
Foreign transaction fee
3%
Keep in mind that balance transfer cards usually charge a fee for each transfer, typically between 3% and 5% of the balance amount. Take that expense into account when crunching the numbers.
Debt relief companies
Distinct from a debt consolidation loan, debt relief (or debt settlement) involves a third party negotiating with your creditors on your behalf to accept less than the full debt owed.
Success isn't guaranteed, though, and most debt relief agencies only work with clients with at least $7,500 in debt. In addition, the charge for their services can be as much of 25% of your enrolled debt. But that can still leave you ahead of the game, depending on how much you owe and how much is forgiven.
Offers in this section are from affiliate partners and selected based on a combination of engagement, product relevance, compensation, and consistent availability.
According to National Debt Relief, clients who complete its debt settlement plan can reduce their enrolled debt by an average of 20% to 25%, after fees.
Freedom Debt Relief has resolved over $20 billion in outstanding debts since 2002. It offers free credit card debt relief consultations.
Money matters — so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox. Sign up here.
Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice to make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of personal finance. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
Catch up on CNBC Select's in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.
