Your bills are taking over your life. You pay some, but not all on time. Creditors are starting to call and demand their payments. What are you to do? You have several options that don’t involve default. Instead, you can consolidate your debt. Your credit score and financial status will determine which option is right for you. How much does it cost, though? We break it down below.
Options for Debt Consolidation
First, let’s look at your options for debt consolidation. The DIY options include:
- Balance transfer credit card
- Personal loan
- Home equity loan
If you can’t manage these on your own, you can enlist a 3rd party. A debt management company can help you consolidate your debt. They do so by negotiating the rates and terms of your loans for you. They also collect your payments and disburse them accordingly.
Of course, none of these services happen for free. You’ll have to pay. Below we discuss the costs you’ll incur.
The Costs of Consolidating Debt with a Credit Card
If you are in over your head in credit card debt, a balance transfer can offer relief. Look for offers with 0% APR. Usually, the 0% offer is temporary. Try to find an offer that lasts for at least 12 months or longer. This gives you time to make enough payments to pay the debt off. Before you accept the card, though, consider the costs. Look for any of the following:
- Annual fee – Credit cards often charge an annual fee. They may even charge it during your 1st billing cycle. Right off the top, you lose a portion of your available credit. You’ll then pay the fee every year. Be careful, though. Some cards charge their annual fee monthly. They break up the annual amount over a period of 12 months. For example, a $75 annual fee would cost $6.25 per month. They charge the amount right to your credit card.
- Balance transfer fee – Most credit cards charge a fee to transfer balances to your new card. The typical fee is 3% of the amount transferred. It varies by company and credit card though. Read the fine print to make sure you understand the cost of transferring. Also, be careful if you transfer more than one balance over. You’ll pay the fee for every transfer you make.
- Late payment fee – Be very careful with your payments on your balance transfer credit card. A late payment by even one day can wreak havoc on your finances. Read the fine print of your agreement. Does it state if you make your payment late that interest accrues? They often charge interest retroactively, going back to the first day you transferred a balance. That late fee could cost you a few hundred dollars or more. Know the terms before you take the card.
The Costs of Consolidating Debt with a Personal Loan
You can get a personal loan from many places. Your local bank is a great place to start. But, you can also shop online. If you don’t qualify for a personal loan from a bank, look for a peer-to-peer lender. Many companies offer this type of financing. It’s investors like you and me funding the loans. The requirements are often less stringent. You can then use the funds to pay off your debts. Before you take out a loan, though, look for these fees.
- Origination fee – Banks charge this fee to cover the cost of originating your loan. It can vary between 1 and 5% of your loan amount. If you borrow $2,000, you could pay between $200 and $1,000 right away.
- Closing fee – Banks also charge you a fee when they close the loan. They claim it covers the cost of doing the paperwork and funding the loan. They may break it down into things like underwriting or processing fee. Sometimes you’ll just see one closing fee though. They lump everything into one category.
- Late fees – Just like any other loan, if you make your payment late, you’ll be charged a fee. He amount varies by lender. Some charge a flat fee. Others charge a percentage of your payment, such as 4-5%. On a $200 payment, you could owe $8-$10 for every late payment you make.
- Early payment fees – Many personal loans allow you to make extra payments whenever you want. Some, though, charge a prepayment penalty for early payoff. Before you make extra payments, find out the terms of your loan.
The Costs of Consolidating Debt with a Home Equity Loan
Home equity loans or lines of credit can consolidate your debt. The difference is you give the bank collateral for the loan. In this case, the collateral is your home. If you don’t make the payments, you lose your home. You can shop around with different lenders for this loan, though. You don’t need to use your current lender. As you shop, make sure you ask about the following fees.
- Origination fee – Just like a personal loan, home equity loans charge origination fees. Usually, you’ll pay between 1 and 3% of the loan amount. Because home equity loans are often for much higher amounts, your origination fee could get costly.
- Processing/Underwriting fees – Home equity loans don’t have the same costs as your original 1st But, the bank does need to make money. You’ll likely pay some type of processing or underwriting fee.
- Title fees – Because you put your home up as collateral, you’ll pay title fees. The title company must make sure there are no liens on your property. For this you’ll pay a title search fee. You’ll also pay title insurance. This ensures the lender that if anyone comes after the home once the search is complete, the lender will still get paid.
- Closing fees – The closing fees for a home equity loan are less than your original mortgage, but they still exist. Lenders have to cover the costs they incur for funding a new loan.
- Annual fee – Don’t be surprised to see an annual fee on your home equity loan or line of credit. It’s especially common with HELOCs. It helps the bank provide access to the funds during your draw period. It works in much the same way as the credit card.
The Costs of Consolidating with a 3rd Party
Even non-profit debt management companies charge you to consolidate your debt. You won’t pay the same fees you see above. Instead, you’ll see things like:
- Account set-up fee – Some agencies charge a fee to start your account. This covers the cost of negotiating with your creditors and collecting your first payment.
- Origination fee – Agencies will charge either an account set-up fee or an origination fee. They won’t charge both as they cover the same costs.
- Monthly maintenance fee – The agency collects your payments and disburses them each month. In order to cover their costs, they charge a monthly maintenance fee.
- Late payment fee – Just like any other debt, if you make your payment late, the bank will charge you a fee. How much you pay depends on the agency.
Don’t Forget the Interest
A fee you may not think about is the interest. It’s not labeled a fee, but you pay it each month. Shop around and find the lowest interest rate available to you. The higher your credit score, the lower your interest in many cases. Lenders charge higher interest for riskier borrowers. A low credit score shows that you could be a risky borrower.
The interest you pay could vary quite a bit. Expect debt consolidation interest rates to vary between 5 and 30%. It depends on the method you choose. Loans from a bank are under certain restrictions. They can’t charge excessive rates. Credit cards, though, can charge much higher rates. Think about how that interest will compound. It can deplete your efforts to pay off your debt. Also, think about how long you’ll have the debt outstanding. The longer you borrow the money, the more interest you’ll pay.
The Bottom Line
The key to getting out of debt fast is finding the least expensive debt consolidation loan. Shop around to see what options you have available to you. Don’t jump straight to credit counseling or a non-profit agency. Instead, see which DIY methods work for you.
The right option will depend on how much debt you have outstanding. Your credit profile also plays a role. If you are behind on many payments, not too many banks will offer a credit card or even a loan. In that case, credit counseling might be warranted. You won’t know until you try, though. You’ll likely save the most consolidating the debt yourself. But, if it’s not an option, debt consolidation with a 3rd party is better than filing for bankruptcy.