One of the best ways to get out of the vicious installment debt cycle is with installment loan debt consolidation.
Installment loan debt consolidation is exactly what it sounds like — paying off all your loans with one single loan or source of credit (or cash if you’re lucky enough to round that up). Usually, the new loan will have a lower interest rate.
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- Break the borrowing cycle
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Why Consolidate Your Installment Loans?
Installment loans are high-interest rate loans that are commonly offered by banks, credit unions and online lenders. Generally, they’re unsecured debt but can sometimes be secured with collateral, like a car. They typically offer a fixed interest rate, but it can be very high, sometimes as high as a payday loan.
Installment loan debt consolidation simplifies your personal finances. Instead of having to keep track of multiple payments to multiple lenders, you just make one fixed-rate payment to one lender or creditor. Because you have fewer payments to remember, you can save money on late fees. It can also lower your interest rate and even possibly raise your credit score.
Top Ways to Consolidate Your Installment Loans
You have a few options if you’re looking to consolidate your loans. Some require higher credit scores than others.
Use Credit Cards with Introductory Interest Rates on Balance Transfers
The best way to consolidate your installment loans is with a line of credit that offers an introductory rate with a low — or zero — annual percentage rate (APR) on credit card balance transfers. You want to find the option with the lowest rates and fees. You’ll need to investigate your credit history. If you have good credit, this is the best option. The hardest part will be qualifying.
You can transfer money from your new credit card account electronically so that some transfers can be completed as quickly as the next business day, or you can have the money transferred directly to a bank account.
Pro tip: You don’t need to have excellent credit to qualify, but your credit score will need to be reasonably high. So check your credit reports with all three major credit bureaus, and know your FICO score before applying. If you find any errors, make sure to dispute them and get them removed from your credit reports before you begin the application process.
When you transfer your debt balance(s) to one of these cards, you are given a “grace period” during which very little (or zero!) interest is charged. Once that grace period passes, the amount you would have been charged in interest is tacked onto your balance and interest begins accruing in the “normal” way. You will need to be sure to make all payments by their due date, or your interest rate could be increased. Set up autopay to make at least the minimum payment each month to ensure this doesn’t happen. If you can pay off your balance within that grace period, you could save yourself hundreds or even thousands of dollars in interest charges!
You can usually find these offers through Citibank, Discover, Wells Fargo, Bank of America and other major credit card issuers.
READ MORE: Best balance transfer credit card offers
Get a Debt Consolidation Loan
Another option is a debt consolidation loan if you can’t find a balance transfer deal. This works like a secured loan, often requiring you to put your home or something else of substantial value up for collateral. If your credit isn’t great, there are a few debt consolidation loans for people with bad credit.
READ MORE: Best debt consolidation loans and companies
Work With a Debt Consolidation Company
A better choice might be to work with a debt consolidation company.
A debt consolidation company is a third-party company that will contact your creditors on your behalf to try to renegotiate your debts, then consolidate them into one monthly payment. Your payment will then usually go directly to the debt consolidation company instead of your creditors.
Obviously, before you sign on any dotted line, you must do your research and thoroughly vet any company that offers you consolidation help.
Best Debt Consolidation Companies for Consolidating Installment Loans
Here are a few options:
DebtHammer offers relief from payday loans and is one of your best options in no small part because, instead of an APR, they charge a flat fee. They offer a free consultation during which they’ll look at your loans and debts. If they agree consolidation will be useful for your particular financial situation, they set up your plan, stop automatic ACH withdrawals from previous lenders and let those lenders know that all communication with you needs to go through them. All you need to do is make your payment to DebtHammer on time.
Here’s a Google review from someone DebtHammer has helped: “The pandemic put so many people into terrible positions, myself included. I had no idea how I was going to pay my loans or ever financially recover. The day I found this company, I felt more relief than I ever have in my life. They were able to create a payment plan and keep those predatory companies away from me. They check in before each payment to make sure I can make it, and are always extremely responsive when I have any questions or concerns. Couldn’t recommend them more, they are working FOR the people and that’s so hard to find these days.”
InCharge Debt Solutions
InCharge is a non-profit that specializes in credit card debt. They go through your credit report with you to make sure that you understand your current financial situation, and then if you decide to work with them, they’ll offer you a variety of plans to help you consolidate and pay off your debt within 3-5 years.
National Debt Relief
National Debt Relief specializes in helping people with debt from multiple sources. The company has an A+ rating from the BBB and promises that it doesn’t charge any up-front fees. They also offer different services, from debt consolidation loans to debt settlement programs.
Accredited Debt Relief
Accredited Debt Relief claims that it can help clients reduce the amount they owe by 50% and that their clients can become debt-free in as little as a year. They only work with clients whose debts total more than $10,000 and whose debts are unsecured. However, if you’re dealing with five-figure debts, they’re a great company to consider!
Other Ways to Consolidate Your Installment Loan Debt
It’s important to understand that an installment loan debt management plan/program differs from an installment loan consolidation loan.
Use a Debt Management Plan
A debt management plan, or DMP, is a structured plan that you put together with a company (like one of those mentioned above) to help you pay off all your debts.
How Does a Debt Management Plan Work?
A nonprofit credit counseling service usually coordinates a debt management plan, so the monthly fee is lower than if you use a debt consolidation company. However, the tradeoff is that a DMP won’t reduce how much you owe. The company will, on your behalf, negotiate payments to your creditors. You send one payment every month to the company. The company takes that payment and divides it among your accounts. A DMP usually costs between $25 to $55 per month.
Borrow From Home Equity or Open a Home Equity Line of Credit
A second mortgage can be a good option if you’ve been in your home a long time and have quite a bit of equity built up. A home equity loan is usually for a predetermined amount of cash. In contrast, a home equity line of credit (HELOC) is usually open-ended, basically, a credit account that’s funded by your home equity. These can be good options to repay your student loans, pay a sudden medical bill or fund home improvements. Because it’s tied to your home, the life of the loan can be fairly long. Just remember that when you borrow from your home equity to consolidate, you can be putting your home at risk. It’s usually a safer option for those who’ve been paying on a mortgage for several years and have built up a significant amount of equity. If you default on a home equity loan, you could lose your home if you default on payments.
Borrow From a 401(k) or Other Retirement Savings
Most companies’ retirement plans have the option to borrow from your savings. Sometimes this can be useful, particularly if you have bad credit and would only qualify for other loans with extremely high interest rates. These are usually fairly low-rate loans, so you stand to save quite a bit in interest. Aside from an origination fee and a small monthly or quarterly fee, the loan proceeds go directly back into your account, so you’re paying all the interest yourself. Most plans have a minimum loan amount.
Because the loan payment is taken directly from your paycheck, there is a chance of defaulting or triggering late fees. However, thoroughly investigate the terms before borrowing this money. Eligibility can be limited. Repayment terms can be complicated. Most plans require you to immediately pay back the balance of your entire loan if you change jobs or are laid off or fired. However, if you think you will be changing jobs, there are no prepayment penalties if you want to pay down your loan sooner than planned.
Apply for a Personal Loan
A personal loan is the most common way to consolidate your debts. These are usually issued by a financial institution, credit union, or online lender, and you’ll usually have a few different loan options. Personal loans will come with a fixed repayment timeline (typically anywhere from six months to five years), fixed interest rate (determined at the time of application), and usually are unsecured, meaning borrowers don’t have to put up any collateral. Loan terms are flexible. Do some homework to find out which banks in your area have the best loan offers before you submit your loan application. Personal loans will have higher borrowing limits than other methods, with some lenders providing loans of $50,000 or more. Creditworthiness will matter. You have to go through a credit check to qualify.
READ MORE: Best personal loans
Debt Consolidation vs. Other Ways to Manage Debt
Of course, there are other ways to manage your debt don’t involve consolidation. Here are a few of the most popular:
- Debt settlement: Settle your debt for less than you owe. Many companies offer this to people who can’t afford to pay their full balances. Warning: it can hurt your credit score.
- Debt avalanche method: Pay only the minimum amount on each account each month. Use any leftover money in your budget to pay down the account with the highest interest rate.
- Debt snowball method: Like a debt avalanche, but the extra funds go to the smallest amount due first, regardless of its interest rate.
Watch here to learn more about the differences between the debt avalanche and debt snowball methods:
Does Debt Consolidation Lower Credit Scores?
Debt consolidation and debt management are great for improving your credit in the long term but will cause your score to take a hit in the short term. This is mostly due to things like changes in your credit utilization, your number of open accounts, etc. The good news is that if you pay off your consolidation loan and are diligent about using credit responsibly going forward, you’ll be able to boost your credit score and qualify for better interest rates.
The Bottom Line
If you’re feeling overwhelmed by monthly payments, debt consolidation is a relatively simple way to condense everything into one easier-to-manage monthly payment. The key is to be sure the payment leaves you with enough flexibility that you don’t have to take on additional debt.
Secured loans require a borrower to put up some form of collateral or personal asset like home equity or a paid-off vehicle. The lender will use this collateral to pay off the loan if the borrower fails to make payments or defaults.
Unsecured loans do not require collateral.
Yes. This is because the lender performs a hard credit inquiry when determining your eligibility. This hard inquiry may cause your credit score to drop by a few points. It can also affect certain other credit score factors, like available credit and debt-to-income ratio. However, you’ll be able to bring your credit score back up over time if you make on-time payments.
Your credit score will help a lender determine whether or not to approve you for the loan, how much you qualify for, loan terms, and the interest rate you’ll pay. Those with good credit scores have many advantages over borrowers with fair to poor credit. The general rule of thumb is this: The higher your credit score, the better your chances of approval at the best rates.