Should you take out a bill consolidation loan?
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If you’re having trouble coping with multiple debts, bill consolidation could be a solution. Bill consolidation is the process of combining multiple bills (like medical bills and credit card bills) into one debt by taking out a new loan.
A personal loan to consolidate your bills could help you get a lower interest rate if you’re burdened with high-interest debt. But before applying for this type of loan, you should consider all the pros and cons.
What is an Invoice Consolidation Loan?
A bill consolidation loan, also known as a debt consolidation loan, is a personal loan that you use to pay off your existing debt. If you’re approved for one, a lender will give you a lump sum that you can then use to pay your bills. Or, the lender can use the funds to pay your creditors directly. Then you will start making payments on the new loan with one monthly payment.
Some benefits of taking out a debt consolidation loan include reducing the number of bills you have to keep track of and potentially reducing your interest rate and monthly payment amount. But some lenders may charge an origination fee for processing the loan, which is usually deducted from your loan amount. Before accepting the loan, make sure you fully understand all fees.
When does a bill consolidation loan make sense?
Signing up for bill consolidation could be a good financial decision in the following scenarios:
You want a lower monthly payment
If you’re having trouble keeping up with your monthly payments, loan consolidation can reduce the amount you pay each month. This could be the case if you get a lower interest rate or replace an existing debt with a loan with a longer repayment period. Remember that choosing a longer repayment period will likely mean you’ll pay more interest over time.
You want a single payment
Coping with multiple bill payments can be a challenge. And if you miss a payment, it could lower your credit score and lead to late fees. A bill consolidation loan combines your monthly payments into one. As a result, you may be less likely to make late payments, which could save you money and help avoid damaging your credit.
You want a lower interest rate
If your credit score and finances have improved since you took on debt, you may qualify for a lower interest rate with a bill consolidation loan. This could help you save money on interest and get out of debt much faster, especially if you’re consolidating high-interest credit card debt.
How to consolidate your debts with a bill consolidation loan
If taking out a bill consolidation loan is right for you, here’s what you should do to consolidate your debt:
- Make a list of your debts. Create a list of all the debts you want to consolidate. Add the total to find out exactly how much you need to borrow.
- Compare lenders. Research and compare different lenders. This will help you find the lowest rates and the best option for your situation.
- Get prequalified. Prequalify with as many lenders as possible to get an idea of the rates and terms you could receive if approved.
- Choose the best loan for you. Once you’ve compared several loan options, choose the best lender for your situation.
- Submit a loan application. After choosing a lender, submit an official loan application. The lender will look at your credit score, income, debt-to-income ratio (DTI), and other key factors to determine if you qualify.
- Receive your loan funds. If you are approved for a loan, your loan funds are usually deposited into your account after you sign your loan agreement. This usually takes one to seven business days, depending on the lender.
- Pay off your debts. Use the loan funds to pay off the debts you want to consolidate, if your lender doesn’t pay your debts directly.
- Make payments on your bill consolidation loan. Repay your loan as agreed – remember to make payments on time to avoid possible late fees. Sign up for automatic payment, if possible, or use a bill management app to find out when your payment is due.
What to consider when choosing a lender
When shopping for a personal loan, it’s important to compare lenders and rates. This helps you find the best deal available. Here are some things to consider when doing comparison shopping:
- Annual percentage rate – The APR of your loan takes into account your interest rate plus any fees. This is an important number because it helps you understand the true cost of the loan.
- Costs – Origination fees, late fees, and prepayment penalties are all common types of personal loan fees. If possible, choose a lender that has no origination fees so that any funds you receive are used to consolidate your debts.
- It’s time to finance — Consider how long you will need the loan funds. Some lenders can issue your funds the next business day, but others can take much longer. If you need your money quickly, choose a lender known for its speed of financing.
- Minimum credit score — Different lenders have different minimum credit score requirements. While some lenders will approve borrowers with fair credit, other lenders will require you to have good to excellent credit.
- Advantages of the lender — Many lenders offer additional perks, such as free credit monitoring and tailored monthly payments. These may be a factor in your decision.
Bill Consolidation Loan FAQs
What types of debt can I consolidate?
You can use your loan funds to consolidate several types of debt, such as credit card bills, utility bills, payday loans, and more. But before taking out a debt consolidation loan, check with the lender if they have any usage restrictions for borrowers. Some lenders may prohibit you from using personal loan funds to repay a student loan.
Should I consolidate all my debts?
You are allowed to choose which debts you want to incorporate into a debt consolidation loan. Consolidating all your debts may not be possible depending on the loan amount you receive. Also, consolidating certain debts may not make sense if it results in a higher interest rate.
Does debt consolidation hurt my credit rating?
When you apply for a debt consolidation loan, a lender performs a thorough credit check to review your credit history. As a result, your credit score could temporarily drop by up to five points, according to FICO. But if you pay off your loan on time, it will add a positive payment history to your credit reports, which could increase your score over time.
Bill Consolidation Loan Alternatives
When it comes to simplifying your bills and potentially lowering your interest rate, a debt consolidation loan isn’t your only option. Here are some alternatives to consider.
Balance transfer credit card
Looking to consolidate your credit card debt? A balance transfer credit card lets you transfer a balance from one credit card to another, and many offer an introductory interest rate of 0% or low for a certain period of time.
By taking advantage of one of these offers, you could save a lot of money on interest. The downside is that once the promotional period expires, you’ll have to pay the standard credit card interest rate on any remaining balance. Additionally, you may have to pay a balance transfer fee, which typically ranges from 3% to 5% of the transfer amount.
Student Loan Refinance
If you have student loans and want to consolidate them, student loan refinancing is probably a better option than a bill consolidation loan. When you refinance your student loans, you take out a private student loan to pay off your existing federal or private student loans.
If you have good credit and a decent income, you may qualify for a lower interest rate. The downside is that if you refinance your federal student loans, you will lose access to federal benefits, such as income-based and forbearance repayment plans.
The debt avalanche method
If you don’t want to consolidate or refinance your debt, you can use a debt repayment strategy to effectively eliminate your debt.
With the debt avalanche method, you first pay off your debt at the highest interest rate. You are putting any extra money you have on this debt while making the minimum payments on your other debts. Once that debt is paid off, you move on to the debt with the next highest interest rate.
One advantage of this method is that it helps you save the most interest. But it might take you a long time to pay off your debt with the highest interest rate if it is a large amount.
The Debt Snowball Method
The debt snowball method is another popular method you can use. With this repayment strategy, you pay off your debt with the smallest balance first. This means investing any extra money in this debt while making the minimum monthly payments on your other debts. Once that debt is eliminated, you move on to paying off the debt with the next smaller balance.
One of the main advantages of the snowball method is that you will eliminate your small debts more quickly. When you see this progress, it can motivate you to keep reducing your debt. But the downside is that you might pay more interest with this strategy because your high-interest debts might not be the first ones you focus on.
Home equity loan or home equity line of credit
If you’re a homeowner, you may be able to tap into the equity in your home by taking out a home equity loan or a home equity line of credit (HELOC).
Since these loans are secured by your home, they may come with lower interest rates than you would get with an unsecured personal loan. But you risk foreclosure on your home if you fail to repay the loan.