Having some debt isn’t necessarily a bad thing, but carrying too much debt for too long can lead to financial headaches. That’s the reason many Americans consider various types of debt consolidation loans. Consumers want to know how much does debt consolidation cost before they make a commitment.
Consider the Debt Consolidation Loan Closing Costs When Calculating Your Monthly Savings
While consolidating and paying off debt can be beneficial, you should understand the downside and costs, such as loan closing costs. Below is more information about debt consolidation loan closing costs and related information to help your decision making.
What Are Debt Consolidation Loans?
A debt consolidation loan is a secured or unsecured loan that merges several high interest debts from several sources and makes them into one loan and payment.
This reduces the need to track several different payments and due dates. Depending on the interest rate, a debt consolidation loan can reduce the monthly and yearly interest paid and get your loans paid off faster.
Generally, the debt consolidation loan process involves taking out another loan, using the proceeds to pay off old, high-interest debts, then pay off the new loan.
So, if you have $20,000 in revolving credit card debt spread on three cards at 20% interest, you might get a personal loan with a 10% rate to pay off that debt over five years. You would pay the debt off much faster and save a lot of interest.
How Much Does Debt Consolidation Cost?
Debt consolidation loans can come with closing costs, as well as other fees such as annual fees, balance transfer fees, and loan origination fees. Before taking out a loan, it’s important to inquire about all potential fees, including those for late payments or early payoff. Depending on the lender, these fees could amount to hundreds or even thousands of dollars.
The cost of debt consolidation loans varies depending upon whether or not you are doing a secured or unsecured loan. For example, if you get a home equity loan for debt consolidation it will cost you more than a personal loan, because the equity loan is secured to real estate. There are more third parties working to finance a 2nd mortgage so in most cases the closing costs and lending fees are higher. However, the interest rates on home equity loans is typically lower than personal loan rates.
Types Of Debt Consolidation Loans
There are several types of debt consolidation loans to consider, depending on your credit living situation:
- Home equity loan or home equity line of credit (HELOC): A popular option for those with good credit is a second mortgage, such as a home equity loan or HELOC. A second mortgage usually has a much lower interest rate than credit cards and can be a great way to lower your debt payments and interest. But you are putting your home at risk, so be sure you can pay the new loan. You will need a credit check to qualify for a home equity loan and enough equity to make it worth the lending companies risk.
- Personal loan: If you have decent credit, you may qualify for a personal loan with a lower rate than your credit cards. A personal loan isn’t secured and your home or other assets are not put at risk.
- Debt consolidation loan: A type of personal, unsecured loan that is made specifically for paying off high interest debt. Many borrowers like this option because it allows them to combine several loans into one with a single monthly payment. Find out debt consolidation hurts your credit.
- Balance transfer credit card: If you have good credit, you could qualify for a balance transfer credit card with zero interest for 12 or 18 months.
Consider speaking to one of our loan professionals to learn which option is best for your financial situation. Any of these options could be a good choice, based on the situation.
Debt Consolidation Loan Fees and Closing Costs
A major consideration with any debt consolidation loan is closing costs and fees. Any loan has costs, so you should know what they are before signing on the dotted line.
Closing costs for a second mortgage, such as a home equity loan or home equity line of credit, can range between 2% and 6%. So, if you borrow $100,000, you could pay $2,000 to $6,000 in closing costs. These costs could be wrapped into the loan, or you might pay a slightly higher interest rate.
For a consolidation loan or personal loan, you can expect to pay an origination fee between 1% and 6% of the loan amount. For a $100,000 personal loan, this means you could pay $1,000 to $6,000 in loan origination fees. Your origination fee could be higher or lower based on your credit score and the amount borrowed. If you have really good credit, you may find a lender that doesn’t charge an origination fee for a debt consolidation or personal loan. Read what the Consumer Finance Protection Bureau says about debt consolidation loan.
When Should You Get a Debt Consolidation Loan?
You could benefit from a debt consolidation loan in the following circumstances:
- You have a lot of high interest debt. If you can pay off the debt in a year or less, you probably don’t need a new loan. The fees and closing costs of a debt consolidation loan aren’t worth it. If you can’t pay it off easily in a year, you may want to consider debt consolidation.
- A decent to high credit score. If your credit score is still good even with your debts, you are more likely to qualify for a loan with a good rate. You could save hundreds or thousands annually on interest if you have a 700 or higher credit score.
- Enough cash flow to pay for debt payments. Once get a debt consolidation loan if you have sufficient income to pay for the new loan. This is even more critical if you take out a second mortgage to pay off your high-interest debt.
Pros and Cons of Paying Closing Costs on Debt Consolidation Loans
Debt consolidation serves as a strategic approach to managing debt, allowing you to settle multiple existing loans with a single new loan, thereby simplifying your financial obligations to one interest rate and monthly payment. The new debt consolidation loan may offer a more favorable interest rate compared to some or all of your individual loans, potentially resulting in cost savings. Reducing interest expenses can expedite your debt repayment timeline.
Virtually any type of debt, including credit card debt, student loans, personal loans, and medical debt, can be consolidated. If your debts have not adversely affected your credit score, you can typically undertake debt consolidation independently, with several consolidation options at your disposal. These include personal loans, balance transfer credit cards, home equity loans or lines of credit, and mortgage cash-out refinancing.
A debt consolidation loan, whether it is a HELOC, home equity loan, or personal loan, is a good option for many people. The best debt consolidation loan is ideal for the borrower with high interest debt, good credit, and a low debt to income ratio. With good financials and credit, there’s a good chance you can qualify for a lower interest loan that will save you money and pay off the principal faster.
If you think you are a good candidate for a debt consolidation loan, speak to one of our loan professionals today. We can help you decide between a HELOC, home equity loan, personal loan, or other options to help you get out of debt.