5 Best Debt Consolidation Companies

Best Debt Consolidation Loans

If you’re struggling to make the minimum repayments on your current loans, have debt across multiple credit cards, or owe several creditors, debt consolidation may be the way to relieve you. 

Debt consolidation allows you to combine all your existing loans into a single loan with more manageable monthly payments so you don’t have to be overwhelmed with making multiple payments to several creditors who often have different interest rates.

What’s more? The best debt consolidation providers will clear your debt with your existing creditors directly to save you the hassle. Find out what debt consolidation is, how to choose the best debt consolidation loan for you, and the providers we recommend so you can get out of debt quicker and live a financially free life.

What is a Debt Consolidation Loan?

A debt consolidation loan is a loan you take out to settle your other smaller debts and credit cards. When you take a debt consolidation loan or debt relief loan, you are effectively combining all your existing debt into a single lump debt and only have to make a single monthly repayment.

Debt consolidation helps you reduce the number of creditors you have. Managing repayments across multiple debt channels and credit cards can be overwhelming and since your loans will have different interest rates, it can be hard to figure out exactly how much you’ll be repaying per month.

When you take out a debt consolidation loan, you know exactly how much you’ll be charged and can work with just one interest rate.

How Does a Debt Consolidation Loan Work?

When you apply for a debt consolidation loan, the provider settles your existing debt with multiple creditors and rolls them over into a single larger loan. The loan you get with a debt consolidation service will typically have a lengthier repayment time than each of your individual original loans, giving you more months to settle your bulk debt and effectively, require you to pay smaller monthly repayments. 

This can help you free up more money and lighten your debt burden. And if you choose from some of the best debt consolidation companies we recommend, you can get a large loan with smaller interest rates than your original loans, meaning you pay less overall to clear your debt.

A Closer Look at The Best Debt Consolidation Loans 

To explain debt consolidation loans better, let’s see a typical example. Supposing you have four credit cards and owe $18,000 across the four of them with an average annual interest rate of 21%, to drive all your cards to zero in 36 months, you’ll have to make a monthly payment of $678.15 and the total interest you’ll pay over that time will be $6,413.44.

Now, supposing you consolidate all your credit card debt into a single loan or card (larger credit limit) with a lower interest rate of say 12%, to cover your original $18,000 debt in the same 36 months, you’ll only need to pay $597.86 per month and a total interest of $3,522.87.

By consolidating your loans into the lower-interest larger loan, you would have saved $2,890.57 in interest payments! 

What are APRs and Why Should I Choose Lower APRs?

The Annual Payment Rate (APR) is the sum of the yearly interest on a loan plus any additional fees the lender charges. The APR is essentially the total cost of taking a loan and is represented as a percentage of the total initial amount you borrowed.

The APR is different from the interest rate on a loan. The APR includes the interest plus origination fees, processing fees, insurance, and other charges like transfer fees. 

When comparing multiple debt consolidation loans, the APR is one of the first and most important considerations you should make. The lower the APR, the less amount you’ll have to pay in total to settle your loan. 

For example: Let's say you took out a loan of $20,000 to be paid over 60 months (or 5 years) and you had two debt consolidation loans to choose from with 6% and 10% APRs respectively. With the 6% APR loan, you’ll be paying back $23,199.36 in total and with the 10% APR loan, you’ll be paying back $25,496.45 in total. 

That is a whopping $2,297.09 extra, so that’s why it’s important to find the lowest APR possible on any loan you’ll be taking.

Is Debt Consolidation a Good Idea?

Wondering whether you should consolidate your debt? Here are some of the benefits you stand to gain:

Save money on interest payments

Like we described earlier, debt consolidation opens up the door for lower interest rates. With multiple credit cards or debts, the lenders will typically have different interest rates and your interest payments can be very erratic. 

When choosing a debt consolidation loan, you can check for the lowest rates and save hundreds or thousands of dollars in the total interest you’ll be paying back.

Lower minimum required repayments

When you consolidate your debt into a larger loan, your new lender will usually give you a longer payment term. Your payment is spread more months and your minimum required repayments is lesser. This frees up more money for you.

Less financial stress

The psychological stress that comes with juggling multiple loans is rarely emphasized - it’s easy to get overwhelmed and anxious when you know you’ll be taking several chunks out of your paycheck to settle your debt.

By consolidating your loans, you know you are making one lump payment per month and can plan your finances better. You won’t need to juggle different payment dates or account for different payment amounts every month.

Risks of Taking a Debt Consolidation Loan

Debt consolidation is a really helpful debt management tool but it’s not all roses and sunshine. If your new consolidation loan is spread out over a very long payment term, you may actually be paying more in interest than you’d have paid with your total original loans.

Secondly, and as an extension of the first point, when you take a new, longer-duration loan, you will be in debt for longer and increase the chances of entering more debt. While a lower interest rate will allow you to keep more money per month, you should ideally put the extra money you have to clear your debt sooner.

Having extra money on hand can make you tempted to spend more and that’s the way to enter even more debt. You should be even stricter with your spending when you consolidate your debt so you can exploit its benefits and become debt-free earlier.

Debt Consolidation and Your Credit Score

It’s important to emphasize how debt consolidation affects your credit. You are taking a bigger loan to pay back several loans and in the short term, debt consolidation will lower your credit score and your eligibility to take new loans.

The positive effects of debt consolidation on your credit score are long term. If you manage your finances and spending properly, you should be able to clear your debts quicker since you’ll be working with lower monthly payments.

The earlier you are able to clear your debt, the lower your credit utilization rate will be - this is a measure of how much of your accessible debt you are using and directly affects your credit score. With more ‘usable debt’ freed up, potential lenders have more confidence that you’ll pay back and will be more willing to grant you future loans.

How to Choose the Best Debt Consolidation Loan Company 

Once you’re ready to pick a debt consolidation loan company, there are some important factors you should consider. Let’s take a look at some of them:

Consider the important metrics - interest, APR, minimum repayments

First, you want to consider the key metrics - the annual interest and minimum repayments - the lender will charge. And like we stated earlier, you must also consider the APR which combines the interest and any additional fees.

Remember, the point of consolidated credit in the first place is to make your repayments easier. You want the lowest APR possible. Also, don’t spread your repayment over too long so you don’t incur too much interest and defeat the purpose.

Your goal should be to pay your loans off as quickly as possible.

Complementary and Done-for-you services

The very best consolidation services on the market should make the payments to your current lenders or card company on your behalf. This takes out the hassle of the consolidation process and also removes the risk of you spending money you are supposed to use to settle your creditors.

You want a debt consolidation provider with a suite of complementary debt assistance services. Some providers will create personaized plans for you to pay back your loan, feature built-in calculators to help you quickly find out complex loan-associated metrics, and offer no-risk, free consultations.

Confirm associated fees

Consider the fees that the lender charges during the debt consolidation process. Does the company charge an origination fee? What is the fine print associated with paying off the loan early? Are there any penalties for missed payments? These are some of the most important questions to ask. 

Some credit card providers give new customers a 0% APR offer when you transfer your previous card balances to them. If the provider you’re considering offers this promo, your goal will be to pay off as much of the consolidated loan as possible before the promotional period expires.

You should also make sure that you are applying to a provider who actually offers debt consolidation for your kind of debt - credit card debt, student loans, etc.

Consider customer support

Let’s face it… many of us are not very good with numbers. Try researching how loan metrics like APR are calculated and you’ll quickly realize why there are experts for these things. 

When choosing a debt consolidation provider, review their customer support options and make sure you only go for one with a thriving support ecosystem of financial experts you can consult with before making any decision.

Should you have any issues with your payments down the line, you don’t want a provider who’ll leave you hanging or doesn’t have a reliable way to reach them. 

Bottom Line

There are many elements to keep in mind when considering credit card consolidation. But if you’re well-informed on the process and what it entails, you’ll know if this route is the right one for you. Credit card consolidation can help you get a better grip on your finances, but it isn’t a decision to take lightly. Remember the factors discussed here, though, and you’ll know what your next step towards financial freedom should be.