Credit card debt looms like a dark cloud. The cloud is colored red in honor of all the red ink the debtor’s finances are drowning under due to high rates of interest. Something really needs to be done to fix things without any more procrastination.
Consolidating debt is one viable strategy to start the process of finally paying off unwanted and burdensome debt. Not every consolidation plan is best — or even viable — for everyone. For those seeking an option, peer-to-peer lending could create a route for possible consolidation strategies.
Lending Club and Proper are two such peer-to-peer lenders. Would they be worth it to someone who wished to consolidate heavy amounts of credit card debt?
The Business of Peer-to-Peer Lending
Peer-to-peer (P2P) lending refers to private transactions between two parties. Borrowers go to a peer-to-peer lending company to seek a loan. Those approved by a preliminary screening find their loan application placed in a queue for investors to review. Private investors who approve the loan put their own funds forward with the intention of receiving a nice rate of interest on the repayment.
Interest rates are not very low. Applicants who go to the Lending Club or Prosper likely have credit scores making them bad options for traditional lenders. High credit card balances scare off banks and credit unions.
Factors to Weigh
Getting the best results from working with peer-to-peer lenders relies on a number of factors. Two of the most important factors to weigh are the available interest rates and the ability to pay off the debt.
If the P2P lending rates are less than the rates being affixed by the credit card companies, then the new loan definitely would be worth considering. One of the greatest obstacles to paying off debt would be the high, almost punitive, interest rates the credit card companies charge. Cutting down on interest rates speed up payoffs.
All this is true provided another factor comes into play. The borrower really does need a reliable payment plan and stick to the path. The purpose of a debt consolidation loan is to get rid of heavy financial obligations. Those who are not incredibly serious about paying off the new P2P loan and make the necessary budget changes to do so won’t be thrilled with their eventual end results.
Overall, the new loan has to be cheaper and provide a more reasonable and viable means of getting rid of credit card debt. The borrower has to do his/her part as well and actually pay down the debt. Otherwise, the process is nothing more than an exercise in shuffling funds.
Anyone wishing to apply for a peer-to-peer loan does need to meet credit score requirements. Lending Club and Prosper’s minimum requirements are very low. In fact, both only require credit scores in the 600 range. Neither lenders may offer loans in certain states. Applicants do need to check if their location and residency ban applying.
Those who are able to apply should conduct further research into how the companies work.
Many people choose the option of consolidating their credit card debt into one affordable loan. In many cases, debt consolidation is a smart move on several fronts. If done correctly, debt consolidation can roll multiple high-interest credits cards into one low-interest loan with one payment. Consumers also see a boost in their credit scores when they consolidate their debt. Here is a closer look at the benefits of debt consolidation.
Debt consolidation can save you big money on interest payments and save hundreds of dollars on monthly payments. With an average interest rate on credit cards hovering around 15 percent, anyone with multiple cards with high account balances are paying big bucks each month. Consolidating that debt into a low-interest personal loan or 0 percent APR credit card dramatically improves your financial standing. Debt consolidation removes the burden of making multiple debt payments each month and simplifies your monthly budget.
Debt Consolidation and Credit Scores
Consolidating your debt does more than reduce interest payments and roll all your debt into one monthly payment. Debt consolidation may help boost your credit score. Credit utilization, which is the amount of your credit card balances in relation to your credit limits, plays a critical role in calculating your credit scores. In many cases, credit utilization influences about 30 percent of your credit score. The higher your credit utilization, the lower your score.
By consolidating your credit card debt into one loan, you eliminate high credit card balances, and your credit utilization ratio drops, which in turn increases your credit score. In a nutshell, if you take out a personal loan to pay off credit cards, your credit utilization ratio drops and your credit score goes up.
However, if you take out a large personal loan to pay off your credit card debt, a large installment loan will appear on your credit report and could lower your score. In addition, the risk of debt consolidation to pay off credit cards opens the door to you adding more money to your credit cards. If you do add more debt to your credit cards, you will see an exponential drop in your credit score.
Debt consolidation offers many credit and noncredit benefits. It is up to you to decide how to use debt consolidation to your favor and improve your overall financial well-being. If you have amassed $50,000 in credit card debt, find out how it happened and look at your spending habits before you consider debt consolidation.
If you are struggling with credit card debt, it’s a good idea to make a commitment toward paying it off. One of the best ways to do it is come up with a way to lower your interest rate. That can ultimately bring low costs and fees as well as a speedier process of paying off your debt. A solution for that is to choose a card with a zero percent APR rate for consolidating your debt, especially when it includes a high interest rate. If you are unfamiliar with this method for credit card debt consolidation, here is more information about it.
Consolidating with a Zero Percent APR Card
Consolidating your debt with a zero percent APR credit card is simple. Credit card companies frequently offer cards with an initial zero percent APR. After you apply for such a card and are approved for it, you can then transfer your debt that contains high interest onto it. After doing this, the debt from your original card is essentially paid off. You then have to begin paying toward the new card until settling your debt.
It’s important to note that if you have poor credit, you may not be eligible for a zero percent APR balance transfer option. If you fall under this category, you can still apply for a card that has a consistently low APR. It’s easier to qualify for those and you can still enjoy lower interest rates.
Advantages of Zero Percent APR Card Option
There are plenty of advantages that come with consolidating your credit card debt with a zero percent APR credit card. Here are three chief ones:
- Interest Savings: The biggest benefit of using a zero percent APR card for consolidating your debt is that you can save a load of money on interest. Cards today have interest rates as high as 30 percent, so it can really be a burden on your finances. You can save hundreds or even thousands of dollars when transferring the balance on such a card to a zero percent APR one.
- Simplicity: It makes everything simpler when you transfer multiple debts onto a single card. It means you only have to make a single payment each month and don’t have to think about which card to pay off first.
- Lower Risk: There is less risk in using a zero percent APR card than with other methods of debt consolidation. You don’t have to worry about losing any assets if you have difficulty making payments.
Be Wary of the Following
Even though using a zero percent APR card is probably the best option for consolidating your debt, you should still be wary of a few possible pitfalls. These include:
- Fees: Consolidating with zero percent APR cards come with fees of usually around three percent each time a balance is transferred onto them. This can really add up with multiple balance transfers.
- Failing to Pay off Card Before Zero Percent APR Period Ends: Be aware of the zero percent APR period and make sure to pay the card off before it ends.
- Late Payments: Avoid getting a zero percent APR card if you are consistently late with bill payments. The introductory deal can be cancelled if you pay late and you’ll be stuck with higher interest rates.
- Exacerbating the Problem of Your Debt: Don’t be tempted to rack up big charges on your other credit cards. It can cost you in the end and make your debt even worse.
In general, consolidating your debt with a zero percent APR card is a great option. As long as you stay focused and use the card wisely, you can rid yourself of your debt and worries.
If you are carrying a high balance on one or more credit card accounts, you may be exploring your financial options. It can be difficult to pay a high credit card balance off because of the combination of a high interest rate and a revolving loan term. As you research the options, you will likely come across a credit card balance transfer and a credit card debt consolidation as viable solutions for dealing with your debt. While these two terms sound seemingly the same, they are actually very different. With a closer look at what these terms mean, you will be able to make a wise financial decision.
What Is a Credit Card Balance Transfer?
With a credit card balance transfer, you are transferring debt from one or multiple credit cards to a single credit card account. In many cases, a credit card balance transfer is done because the receiving credit card has a great promotion on balance transfers. For example, balance transfers may receive a low interest rate or may have no balance transfer fees. In some instances, the balance transfer rate may be as low as zero percent for a short period of time. This gives you the opportunity to potentially save hundreds of dollars or more interest during the promotional time period. However, the rate often rises substantially after the promotional period ends.
What Is Debt Consolidation?
A debt consolidation involves transferring credit card debt to a single credit card or a personal loan. More commonly, a personal loan is used because it has the benefit of a fixed term and a low fixed interest rate. Many people who pursue debt consolidation will apply for an unsecured personal loan or even a home equity loan through a bank. Because the interest rate is low and the term is fixed, you generally will have significantly lower monthly payments until the debt is paid off. At the end of the fixed term period, the debt will be entirely eliminated.
How Should You Use These Options?
If you are comparing the two options, it is important to consider two things. First, think about how much of your debt you can reasonably pay off during the introductory period for your credit card balance transfer option. Second, consider if you will qualify for a debt consolidation loan through a bank. This option requires you to have a good credit score in most cases, so it is not suitable for everyone. A great middle ground between both options may be to use the special offer on a credit card balance transfer. Right before the special period expires, you can transfer the debt to a personal loan with a fixed term. This gives you the ability to take advantage of both options.
Managing debt responsibly is important. While you are trying to pay down and ultimately eliminate your credit card debt, take steps to avoid making additional charges to your accounts. By doing so, you may eventually reach a point of being debt-free.
Due to the continued increased cost of living, stagnated wages, and other life circumstances, many people may need to rely on credit cards and other forms of debt to finance their daily lives. Unfortunately, this often leads to the accumulation of a lot of different credit card accounts, each of which can carry a high interest rate and balance.
For those that have a lot of debt, one of the most common recommendations is to consolidate debt. For those that are looking to consolidate debt and regain financial freedom, there are several factors that should be considered before entering into any debt consolidation or repayment plan.
Consider Your Intent and Ability
The first factor to consider is whether you truly intend to pay off your debt and have the financial ability to do so. Many people find themselves in a lot of debt because they have not been able to budget their financial lives. In many cases, this gets them to a position where paying the debt back in a reasonable period of time even if they are able to make major changes to their lives.
If you are unable to find ways to cut back on your expenses or lifestyle, or do not have the means to make any payment, then it may be a good idea to consider other options, such as filing for bankruptcy. However, if you are willing to change your financial decisions and have some excess money after budgeting to repay the balance, then consolidating could be a great option.
Establish a Repayment Plan and Budget
Before entering into any repayment plan, you first need to figure out what your budget should be. Your budget should be conservative and include a lot of areas to better manage your finances, but should also be realistic. Your budget should definitely include a reserve to save up an emergency fund and also have a set payment available to pay back your consolidation loan.
Consider Your Options
Once you have determined your budget, the next step is to consider your options for debt consolidation. One of the most common forms of credit card consolidation is to open up an account that offers an introductory low interest rate. Many credit card providers entice new customers by offering zero percent financing for up to 18 months and also allow for free rollovers. While these could be the most affordable options for a few years, the low interest period is relatively short and provides you with little time to repay the balance.
Another option to repay your debt is to tap into your home equity. If you have more than 20% equity in your home, you could either cash out through a new mortgage or open a home equity loan. In any event, the interest rate that you will receive will be much lower than what you would have to pay on a traditional credit card.
The third option is to take out a loan against your 401k. 401k loans are often a good idea because any interest you pay is paid back into your account, which effectively makes them free. The only drawback is that this could delay your accumulation of retirement equity.
If you’re dealing with a significant amount of debt spread out over multiple credit cards or loans, then you may be considering debt consolidation. This isn’t a magic ticket out of debt, but if done correctly, it can save you money and help you pay off your debt more easily.
Debt Consolidation Methods
There are a few ways that you can consolidate your debt. You can obtain a loan with a lower interest rate than you currently have and use it to pay off all your debt. You can also use credit, either with a home equity line of credit or a 0-percent annual percentage yield (APR) credit card, to pay off your debt. Keep in mind that with a 0-percent APR credit card, that APR is only the introductory rate, which typically lasts for a year. If you carry a balance longer than that, the interest rate will go up, so you need to make sure you can pay off what you owe within that introductory time period.
Consolidating Debt for a Lower Interest Rate
The best reason to consolidate your debt is to pay less in interest. Instead of paying balances on multiple credit cards that have APRs between 14 and 20 percent, you can get a loan with an APR of 8 percent and save hundreds or thousands in interest per year. Or, you could transfer those balances to a 0-percent APR credit card. Keep in mind that you will need a good credit score to obtain a loan with a low interest rate or a 0-percent APR credit card.
You may also want to consolidate your debt if your current debt has a variable interest rate. Since variable interest rates increase when the market interest rate increases, you’ll end up paying more if that happens. It’s safer to consolidate your debt so you have a fixed interest rate.
Making Debt Easier to Manage
Consolidating your debt can also help you manage it better. When you have multiple payments to make, it’s easy to forget one or more and get hit with late fees. With consolidation, you’ll only have one payment to make every month. If you use a loan to consolidate your debt, you also will have it paid off at the end of the term. This is helpful if you are dealing with lines of credit, where it’s easier to keep spending and only paying the minimum, which results in debt that takes years or even decades to pay off.
Debt consolidation isn’t always the right solution. If you have a small amount of debt that you could realistically pay off within about six months, it’s better to save time and just budget properly instead. Remember that while debt consolidation can help, you’re only treating the symptom, not the underlying problem. To avoid getting back into debt in the future, you’ll need to build better financial habits and make su
When you own a small business, you know that it’s easy to fall into debt. Having cash flow problems or unforeseen emergencies can result in the problem. Other ways to fall into debt as a small business owner is taking out multiple loans, also known as “stacked” loans. These usually end up with APR rates that fall into double or even triple digits. A solution to this kind of debt is to improve your cash flow, which can ultimately help your business to grow.
Business Debt Consolidation or Debt Refinancing?
The acts of consolidating your debt and refinancing your debt are a lot alike. However, they have their noticeable differences. For instance, when you refinance a loan for your business, it is generally with a lower interest and is used to pay off your previous or original loan. Debt consolidation, on the other hand, occurs when multiple loans or merchant cash advances are put together into a single loan, which can mean you have lower payments.
More and more small business borrowers end up with multiple merchant cash advances and business loans with high interest, something known as loan stacking. This frequently occurs when you don’t qualify for a single low interest business loan. Unfortunately, if you have loan stacking, you probably won’t be able to refinance your business debt with a regular loan from a bank. Instead, consolidating your debt is for you. The following companies offer this option with certain perks:
SmartBiz: Offers Lowest Rates
As a business owner, you no doubt want the lowest rates possible when having to consolidate your debt. SmartBiz is the best option for that very reason as the company offers low rates that can help with cash flow issues. It connects business owners with US Small Business Administration recognized loans. These loans boast some of the best competitive rates. At the same time, the application process is long and tedious. You must also have a strong business performance and good credit.
Funding Circle: Best for Low Revenue
Funding Circle is great for businesses that are firmly established and want quick cash and good APR rates. The application process is faster than with SmartBiz and your business must have been active for at least two years. A credit score of a minimum of 620 is also required to qualify. There are also flexible term lengths with Funding Circle.
Credibility Capital: Good for Very Young Businesses
Your business must be at least one year old to qualify for Credibility Capital’s short-term financing options. It’s good for companies that have good credit and requires the business have $100,000 in annual revenue. However, it’s not for long-term financing.
Able Lending: For Strong Network Businesses
Able provides loans of up to $1 million, great for companies that have a sizable customer base. Its APRs range from a very low eight percent to 25. To qualify, businesses must have been around for at least one year and earn $100,000 in revenue. A credit score of at least 600 is also necessary.
Consolidating your business debt is a must if you are struggling with stacked loans. You can conveniently find the company that best fits your needs by comparing what they offer and your own qualifications.