Survey: 48% of Those Who Consolidated Debt Encountered a Scam
Debt consolidation can be a lifeline for consumers who are struggling to keep up with multiple credit card bills and loan payments. One method for consolidating debt is with a personal loan, through which you repay one or more types of debt in a single monthly payment at a fixed interest rate.
Debt consolidation loans can potentially help borrowers save money while getting out of debt faster, but do they always work as intended? To answer this question, US News in January surveyed 1,202 consumers who have ever borrowed a debt consolidation loan. We asked respondents a series of questions to find out how consolidating debt into a personal loan impacted their finances. Here’s what we found:
- The majority of borrowers (69%) say their finances have improved since consolidating their debt. Among them, 50% say they’re less worried about being able to afford their debt payments, 44% say they’re able to put more money toward paying off other debts and 37% say they’re able to allocate more income toward savings. . Likewise, 69% of respondents would recommend a debt consolidation loan to a friend or relative.
- Over a third (36%) of borrowers saw their credit scores rise after opening a debt consolidation loan. while 26% say their scores fell. About a fifth of borrowers don’t know or say there wasn’t a change, at 20% and 18%, respectively.
- The no. 1 reason why borrowers opened a debt consolidation loan was to pay off their debt faster, with a third of respondents (33%) saying so. They also wanted to simplify their debt repayment by combining multiple bills into one (21%) and lower their monthly payments (20%).
- credit card debt was the most common type of debt borrowers consolidated (68%), followed by other personal loans (27%), medical bills (26%) and payday loans (21%). About two-thirds of respondents (66%) consolidated $5,000 worth of debt or more, and 30% consolidated $10,000 or more.
- The majority of applicants took preparations before borrowing a debt consolidation loan. Nearly 70% shopped around to compare interest rates across multiple lenders, and 53% took steps to improve their credit score before applying.
- About one in three borrowers (35%) regret taking out a debt consolidation loan. The most common complaints are that the interest rate was higher than expected, the monthly payments were too high, the fees were too high and it’s taking longer to repay the debt, all at 38%.
- Nearly half of respondents came across scams while shopping for a debt consolidation loan. with 48% hearing about an offer that seemed too good to be true.
For Most Borrowers, Debt Consolidation Pays Off
Debt consolidation was a worthwhile pursuit for the majority of borrowers in our survey, with 69% of respondents agreeing that their finances have improved since borrowing a debt consolidation loan. The same amount (69%) would recommend debt consolidation to a friend or relative.
Additionally, debt consolidation loans tend to have a more positive than negative effect on a borrower’s credit score. Over a third of borrowers (36%) say their credit score rose after borrowing a debt consolidation loan, compared with the 26% who say their credit score dropped. While applying for a loan results in a hard credit inquiry that leaves a minor derogatory mark on your credit report, it can also help your credit score by reducing your credit utilization rate and diversifying your credit mix.
Among respondents who say their finances have improved after debt consolidation, 50% are now less worried about being able to afford their bill payments. Since debt consolidation loans can combine multiple bills into a single payment, it can be easier to keep up with repayment. And depending on the terms of the loan, it may be possible to get a lower monthly payment when compared with the total of all bills paid separately.
Take this example: If a borrower is making the minimum payment on $10,000 worth of debt across three credit cards with an average annual percentage rate of 21%, the consumer could save about $70 per month by consolidating into a five-year personal loan at an 8.5% interest rate. Plus, the borrower would get out of debt years faster while paying thousands less in interest over time.
Survey respondents were able to put the money they saved to work. Forty-four percent say they’re able to put more money toward paying off other debts, such as a mortgage or auto loan, and 37% are able to allocate more of their income toward savings. Additionally, about a fifth (21%) are able to increase contributions to their retirement accounts.
Faster Debt Repayment Is A Top Priority Among Borrowers
When asked to identify their No. 1 priority when consolidating their debt, a third of borrowers (33%) say they wanted to pay off debt faster, making it the most popular reason for opening a debt consolidation loan. Next, a fifth of respondents (21%) had the goal of combining multiple bills into one payment, while about the same amount (20%) wanted to lower their monthly bill payments. These are followed by getting a better interest rate (16%) and saving the most amount of money over time (11%).
While it may seem that borrowers are prioritizing short-term savings over long-term goals, that’s not necessarily the case. Many of these goals feed into each other: Faster debt repayment translates to fewer overall interest payments and significant savings over time. And getting a lower interest rate can help borrowers save money on their monthly payments as well as over the course of the debt repayment.
Borrowers Consolidated Credit Card Balances, Medical Bills and More
Debt consolidation loans can be used to repay virtually any type of debt. Credit card debt was the most common type of debt consolidated among borrowers in our survey, with 68% of respondents using a personal loan to pay off credit cards. About a quarter of borrowers used a debt consolidation loan to pay off other personal loans (27%) or medical bills (26%), and just over a fifth (21%) consolidated payday loans.
Consolidating credit card balances into a personal loan lets you switch from a variable APR to a fixed interest rate, which can make it much easier to repay debt. In the case of payday loans, debt consolidation can help borrowers escape the cycle of reborrowing at expensive fees. And it’s possible to refinance a personal loan into a new debt consolidation loan that has better terms, such as a lower interest rate.
While it can be a savvy idea to repay high-interest bills with a debt consolidation loan, it’s not necessarily the best way to pay off every type of debt. For example, medical bills may be eligible for low-interest or interest-free payment plans, depending on the health care provider. And in some cases, it may be possible to negotiate the medical debt and settle the balance for less than you owe.
About 1 in 3 Respondents Regret Consolidating Their Debt
Personal loans can be a helpful tool for repaying different types of debt, but this debt consolidation strategy isn’t right for every borrower. More than a third of respondents (35%) regret borrowing a debt consolidation loan. Among them, 38% each feel that the interest rate, fees and/or monthly payments are too high. The same percentage are frustrated that it’s taking them longer to repay their debt.
It’s true that debt consolidation loan rates can be higher for some borrowers. Lenders determine applicants’ interest rates based in part on their credit scores and debt-to-income ratios, among other things. Those with good or excellent credit will see much lower rates than those with fair or bad credit.
Because interest rates can vary so widely depending on creditworthiness, it’s important for debt consolidation loan borrowers to work on improving their credit score before applying. In fact, over half (53%) of borrowers in our survey say they took steps to improve their credit before consolidating their debt, such as:
- Paying down credit card debt (58%).
- Improving their on-time payment history (49%).
- Reducing their credit utilization rate (36%).
- Opening a new credit account (27%).
Additionally, interest rates can vary from one lender to another. Most debt consolidation lenders let you get prequalified to see your estimated rate with a soft credit inquiry, which won’t affect your credit score. Thankfully, the majority of borrowers surveyed (69%) shopped around with multiple lenders to compare interest rates. Of those who did prequalify, 47% compared three lenders, while 26% compared two.
Nearly Half of Respondents Encountered a Debt Consolidation Scam
Debt consolidation is an umbrella term used to describe a number of services, including personal loans, credit counseling and credit card balance transfers. Often, though, bad actors will use the term debt consolidation to lure unwitting consumers into debt relief scams.
Almost half of survey respondents (48%) came across scams while shopping for a debt consolidation loan, hearing of offers that sounded too good to be true. Here are a few tips for avoiding debt consolidation scams:
- Be on the lookout for red flags. Scammers may use aggressive tactics to pressure you into signing up for their services. If a company charges upfront fees or asks for sensitive personal information before giving you any details, take this as a warning sign. And if it promises to lower the amount of debt you owe, it could be a for-profit debt settlement company.
- Do your homework. Research the company through the Better Business Bureau to determine if it’s an authorized lender, or check with your state’s attorney general’s office for consumer complaints about the company. If you’re dealing with someone who claims to be a nonprofit credit counselor, check with a trade organization like the National Foundation for Credit Counseling to be sure it’s certified.
- Get more information in writing. In most cases, lenders are required to provide a loan disclosure that outlines the specific terms of borrowing, such as the interest rate, repayment term and any fees they charge. When a company is hesitant to share details about a specific offer, it’s a sign that it’s not legitimate.
Finding a reputable lender for debt consolidation doesn’t need to be a challenge. Just be sure to do your research and read lender reviews – but if you need additional help with managing your debt, reach out to an accredited credit counselor for advice.