In 2018, Americans carried more than one trillion ¹ dollars in unpaid credit card balances. The national average on credit card interest fees in 2018 ranges from 16%-21%² and consumers are looking for ways to pay off this high-interest debt.

Getting rid of this debt is why America should consider debt consolidation. Debt consolidation is simply taking all of the existing debt and consolidating the debt into one loan over a fixed period. The debt consolidation loan could pay off all of the current credit cards, student loans, wedding or vacation loans, and place all of this debt into one loan payment. 

When the debt was sitting as credit card debt, the principal amount never went down. Once the debt consolidation loan is finalized, all credit card and loans are at a zero balance. The debt consolidation loan will start lowering the principal amount with every payment made until the loan is paid off.

The interest savings can be applied to the principal debt amount instead of interest paid to the credit card companies or other high-interest loan providers.

The debt consolidation loan will free up your capital, give you some room to breathe and can help you get out of poor spending habits if you can remain disciplined.

Searching for the Best Debt Consolidation Loan

Interest Rate Shopping

When you start the search for debt consolidation, saving money on interest payments is the priority. If you are currently paying the national average ranging from 16% to 21% on your credit card, the first goal will be to find an interest rate a lot closer to 6%-10%. Your credit score and credit history will determine the interest rate offered by lender.

Repayment Term and Your Budget

The length of the repayment term is the biggest consideration when you start searching for debt consideration. The interest cost will be lower with a shorter term, but the payment will be higher. These debt consolidation calculations show repayment over three years and seven years and you can see the difference in monthly interest expense.

Is the Shortest Repayment Term the Best Option?

The shortest repayment term will save you the most money over the long term in interest expense, but you have probably been cash strapped with credit card interest payments for a while. Consider the interest expense in comparison to your lifestyle. How much pressure do you want to place on yourself? We recommend making the repayment term a bit forgiving. The last thing you will want to do is start adding new debt to your credit cards. If you have a bit of free cash every month, you can purchase the items that you have not been able to buy for a very long time. The most important lesson is not to first racking up new debt on the empty credit cards.

What Size of Debt Consolidation Loan Should I apply for?

Take all of the current credit cards and any other items that you plan on paying off with a debt consolidation loan. Look at your student loans or other personal loans and compare the interest expense. This total is the amount of the debt consolidation loan.

What Size of Debt Consolidation Loan Payment Can You Afford?

Take your net income and deduct your current monthly payments. Make sure to include everything including eating out, rent/mortgage, utilities and so on. Remove all of the debt and monthly payments that you plan on paying off with the debt consolidation loan. The money left over is the new monthly dollar amount that you can work with and apply towards the debt consolidation loan.

Available Funds for Debt Consolidation Loan

Online lenders cap unsecured debt consolidation loan amounts at $100,000. There are hundreds of loan providers to choose from online but only a few that will offer unsecured personal loans above $50,000.

SoFi offers debt consolidation loans from $5,000 to $100,000 with no origination fees and terms up to 7 years. Credit score starting at 660+ 

Earnest offers debt consolidation loan up to $75,000, and you will require a credit score above 680. No fees for origination, no prepayment fees, and no anything fees. Term up to 5 years.

(Earnest do not offer loans in Alabama, Delaware, Kentucky, Nevada, and Rhode Island)

Upgrade offers debt consolidation loans or credit line up to $50,000 with credit score starting at 620. They charge an origination fee ranging from 1.5% to 6% 

  • Applicants must not reside in CO, CT, IA, MA, MD, VT, and WV

If you were applying for a debt consolidation loan amount over $100,000, we would recommend that you look into a secured loan using your home or other assets to secure the loan. Interest rates are the lowest when you use some form of security against the loan.
Talk to your bank, credit union or online providers about the equity in your home or other assets. A Home Equity Line Of Credit or a home equity loan as they both a great option for debt consolidation.

Your Credit Score

Your credit score is critical when applying for debt consolidation. If your credit score is below 620, the interest rate offered by all lenders could be higher than your credit card interest amount that you are paying today. As well, if your credit score is below 580, the maximum amount you can borrow will be under $5,000 eliminating the possibility of qualifying for a debt consolidation loan. This free credit score service provides your credit score information once per year at no charge from Experian, TransUnion and Equifax.
Most lenders have a minimum credit score requirement starting at 590+. If your credit score is below this amount, here is a provider that will help you rebuild your credit score at no charge and get you ready to apply for a debt consolidation loan.

Lender Fees Lender fees go hand in hand with your credit score. If you have a great credit score, it is quite easy to find a lender that will waive origination fees or other fees like prepayment or application fees.
Most lenders will list their fees right up front, especially the origination fee. The origination fee can be 1-6% depending on your credit score. 
If your credit score is below 650, it becomes more difficult to find lenders that will waive these additional fees. Make sure to read the terms and conditions of the loan before you sign up fro any loan.

Early Repayment

Check for prepayment fees on the loan application. If you are fortunate enough to get a significant tax return or if you can make a large lump sum payment, you do not want to be penalized for paying the loan off early.

Balance Transfer Credit Cards

If you have a good to great credit score and are disciplined, a balance transfer credit card is a good option. Take as much credit as the credit card provider will offer you at 0% interest. Some credit card providers will offer you an 18 month or 21-month term.
The length of term the credit card provider offers you is essential. Set up auto-withdrawal payments from your bank account to pay off the entire amount before you would ever have to start making an interest payment. The amount to apply for should be whatever you can afford to pay off over the term offered.

Get Some Help With Your Spending Habits

The greatest danger of debt consolidation is that you have taken the step to pay off your credit cards and now the credit cards are empty. If your spending habits do not change, the credit cards may become full of debt again, then what?

Novita provides help with becoming aware of how you are spending and will help you to make sure you are making your payments on time and budget.

This video will provide you some information on shopping and offers you signs to find out if you have a shopping problem.

Over Shopping Signs

• Do you have items that you have purchased that you have never opened?
• Have you ever bought something that you do not need or even plan on using?
• Have you ever gone shopping when you are hungry angry or tired and came home with items that you are also surprised that you purchased.
• Do you get a rush or thrill when you shop of buying
• Do you ever feel angry, sad or remorseful after you made excessive purchases?
• Do you hide what you purchase from your spouse or friends?
• Does it feel like you NEED to shop?
• Have you been out shopping and made purchases that you know that you cannot afford?

If you are saying yes to any of these points listed above, you may have a shopping addiction and should consider getting some help. 

Debt Settlement vs. Debt Consolidation

A lot of us start looking for debt consolidation after we have severely damaged our credit score and cannot find a loan. In our view, debt settlement only becomes an option when:

• You cannot qualify for a debt consolidation loan
• You are many months behind in your credit card and loan payments
• Your debt has already been moved over to collections by your credit card and loan providers
• You are not communicating or hiding from your lenders or collections companies
• You have already contemplating bankruptcy

If you have stopped making your payments to the credit card companies and loan providers, the damage to your credit score is already done. When you contact every lender and get your payments up to date, your credit score will start to improve Applying for debt settlement damages your credit score when you stop making payments to all of your creditors.

If your lenders have moved your debt to collections, and now the collection companies are calling. At this point, using a professional debt settlement company will remove the burden of dealing with collection companies and allow you to focus on the process under professional direction from the debt settlement provider.

Do not expect lenders to "welcome you back" after you have completed debt settlement. Expect exactly the opposite. Debt settlement means that you've hired someone to force your lenders to take less than what you originally agreed to pay. Treating people this way never goes well.

Debt robs us of our freedom to do what we want in our lives, and we need to develop healthy anger towards the way our society attempts to manipulate us towards thinking we need everything. There is incredible freedom in not needing anything. Start looking at debt as the enemy. Build a plan to defeat debt, not feed it.

  1. Federal Reserve Consumer Credit Outstanding 2018 - Federal Reserve Consumer Credit Outstanding 2018
  2. 2018 Credit Card Interest Rates Averages - 2018 Credit Card Interest Rates Averages
  3. How to build credit - 7 Ways to build credit
  4. Understanding FICO Scores - Understanding FICO Scores acquired July 2018