Study: Debt Consolidation Benefits 69% of Borrowers | Personal Loans and Advice

Debt consolidation can be a lifeline for consumers overwhelmed with multiple credit card bills and loan payments. One way to consolidate debt is a personal loan at a fixed rate in which he pays off one or more types of debt in one monthly payment.

Debt consolidation loans can help borrowers get out of debt faster while saving money, but do they always work as intended? We surveyed 1,202 consumers who had taken out a consolidation loan. We asked respondents a series of questions to find out how consolidating debt into personal loans affected their finances. Here’s what we found:

Debt consolidation is a worthwhile endeavor for the majority of borrowers in our survey, with 69% of respondents agreeing that their financial situation has improved since taking out a debt consolidation loan. The same amount (69%) recommend debt consolidation to a friend or relative.

Additionally, debt consolidation loans tend to have a more positive than negative impact on a borrower’s creditworthiness. More than a third of his borrowers (36%) said their credit score increased after taking out a debt consolidation loan, while only 26% said their credit score decreased. bottom. Applying for a loan can lead to tougher credit checks and a derogatory mark on your credit report, but it can also improve your credit score by reducing your credit utilization and diversifying your credit mix.

50% of respondents who said their finances improved after consolidating their debts were less worried about whether they could afford to pay their bills. A debt consolidation loan allows you to combine multiple bills into one payment, making repayment easier. Also, depending on the terms of the loan, your monthly payments may be less compared to the sum of all your separately paid bills.

Consider the following example: If a borrower pays $10,000 worth of debt on 3 credit cards at minimum payments, with an average annual interest rate of 21%, the consumer rolls it into a 5-year personal loan. Save about $70 per month. Interest rate 8.5%. Additionally, borrowers can get out of debt years faster, but pay thousands less in interest over time.

Survey respondents were able to use the money they saved at work. 44% said they could spend more money paying off other debts such as mortgages and car loans, and 37% said they could put more of their income into savings. increase. Additionally, about one-fifth (21%) are able to increase contributions to their retirement accounts.

When asked what their top priority is when consolidating debt, a third (33%) of borrowers say they want to pay off their debt faster, making it the most common reason for opening a debt consolidation loan . Next, while one-fifth (21%) of the respondents had a goal of consolidating multiple bills into one payment, nearly the same amount (20%) of respondents wanted to pay less for This is followed by a higher interest rate (16%), which will save you the most money over time (11%).

While it may appear that borrowers prioritize short-term savings over long-term goals, this is not always the case. Many of these goals interact with each other. Paying off your debt sooner reduces your overall interest payments, leading to significant savings over time. Lower interest rates also save borrowers money not only in their monthly payments, but also in the debt repayment process.

Debt consolidation loans can be used to pay off virtually any type of debt. Credit card debt was the most common type of debt consolidated among borrowers in the survey, with 68% of respondents using personal loans to pay off their credit cards. About a quarter of borrowers used a debt consolidation loan to pay off other personal loans (27%) or medical expenses (26%), and just over a fifth (21%) put together a payday loan used.

Consolidating your credit card balance into a personal loan allows you to switch from a variable APR to a fixed rate, making it much easier to pay off your debt. For payday loans, debt consolidation helps borrowers escape the cycle of refinancing with high fees. You can also refinance your personal loan with a new debt consolidation loan with better terms, such as a lower interest rate.

Paying off high-interest bills with a debt consolidation loan may be a smart idea, but it may not be the best way to pay off all types of debt. , your medical expenses may be covered by low-interest or interest-free payment plans. Also, in some cases, you may be able to negotiate your medical debt and settle the balance for less than you owe.

Personal loans are a useful tool for paying off many types of debt, but this debt consolidation strategy is not suitable for all borrowers. More than one-third of her respondents (35%) regret taking out a debt consolidation loan. Of those, 38% feel the interest rates, fees and monthly payments are too high. The same percentage of people are unhappy with how long it takes them to pay off their debt.

It is true that debt consolidation loan interest rates can be higher for some borrowers. Lenders determine the interest rate for applicants based on factors such as the applicant’s credit score and debt-to-income ratio. People with good or excellent credit will see much lower interest rates than those with fair or poor credit.

Interest rates can vary widely depending on creditworthiness, so it’s important for debt consolidation loan borrowers to work on improving their credit score before applying. In fact, more than half (53%) of borrowers in our survey said they took steps to improve their credit before consolidating their debt.

Additionally, interest rates may vary from lender to lender. Most debt consolidation lenders can prequalify you to have their estimated rates verified with a soft credit check that does not affect your credit score. Thankfully, the majority of borrowers surveyed (69%) We shopped with multiple lenders to compare rates. His 47% of prequalified people compared his three lenders and 26% compared her two lenders.

Debt consolidation is an umbrella term used to describe many services such as personal loans, credit counseling, and credit card balance transfers. However, bad actors often use the term debt consolidation to unknowingly lure consumers into debt relief scams.

Nearly half (48%) of survey respondents were scammed while purchasing a debt consolidation loan and heard offers that were far too lucrative. Here are some tips to avoid debt consolidation scams.

Finding a reputable lender for debt consolidation is not difficult. Be sure to do your research and read the reviews of the lender. However, if you need more help managing your debt, talk to a certified credit her counselor.