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Debt consolidation loans: Replace multiple bills at a low interest rate

What is debt consolidation?

Debt consolidation is a debt relief method that combines one or more debts into a single one. For instance, you could utilize a balance transfer credit card or a debt consolidation loan, or a program to pay off previous bills on more favorable terms.

The ideal scenario for debt consolidation is to have a lower APR than the one you are now paying. It can cut your monthly payments, lower interest costs, and speed up debt repayment.

How does debt consolidation work?

You may consolidate your debt in various ways, but it always involves gathering all your existing debts and repaying them with a single monthly payment. Your options may include the following:

  • Obtaining a new loan and paying down current debt or debts.
  • Transferring balances into a new card.
  • Taking professional help through a consolidation program.

One of these options might be more effective for you than another. It may depend on your specific financial situation, including the amount of debt you need to consolidate, your credit score, how quickly you need the money, the sort of debt you have, and other elements.

  Benefits Drawbacks

Consolidation loans

Combine multiple debts into one fixed monthly payment with debt consolidation loan.

  • Fixed monthly payments with fixed APR.
  • APR will be lower compared to you’re current one.
  • Single loan instead of multiple debts.
  • Stress-free life as it is easy to manage a single low-interest loan.
  • No debt collection calls as the previous debt is paid off.
  • APRs can vary depending on fair and bad credit consumers.
  • It may include fees, such as loan origination fees and prepayment penalties.
  • Bad credit borrowers may find it difficult to get it.

Balance transfer credit cards

Consolidate credit card debt using a balance transfer credit card with a lower APR.

  • Some cards offer introductory 0% APR periods for as long as 20 months.
  • It may offer a much lower APR than what you currently pay on your credit cards.
  • Variable APR.
  • It can only be used for credit card consolidation.
  • Only borrowers with solid credit may get amazing introductory offers such as 0% APR.
  • It may include a balance transfer fee of 3% to 5%.

Home equity loans

Use your home as collateral, tap into the home’s equity to get a lump sum amount for paying off debts.

  • Fixed monthly payments and APR.
  • Interest rates are lower than with unsecured debt.
  • You may consolidate a significant amount of debt at once.
  • You need to be a homeowner to become eligible.
  • You might face foreclosure if you fail to pay.
  • You could go underwater in your home.
  • It may include closing costs.

Debt consolidation program

A debt consolidation program might greatly aid you in paying off your unsecured debt by setting you up with a manageable monthly payment schedule. With this service, you can pay just one monthly bill instead of seven or eight.

 

  • You may lower your monthly payments.
  • You'll get just one monthly payment schedule.
  • You may eliminate the fines or late fees.
  • You may pay off your debt within two to five years.
  • You can gradually improve your credit.
  • You may stop or reduce the number of creditors' calls.
  • There is no assurance that debt consolidation will prevent future debt accumulation.
  • Missing payments will increase your debt burden.
  • Certain consolidation companies could charge you a lot of money for their services.
  • Under a consolidation program, paying off debts could take 4-6 years.

What are the types of debt consolidation loans?

There are two main types of debt consolidation loans:

a) Unsecured debt consolidation loans

Unsecured loans might be more challenging as there is no collateral to secure them. They typically offer more easy qualifying criteria and higher interest rates. Interest rates on these loans are often lower than conventional credit cards. The rates are generally fixed and do not change throughout the repayment time.

A few examples may include:

  • Personal loans - A personal loan enables you to borrow money from a lender for nearly any reason. These loans often have a set duration, interest rate, and payment schedule due each month.

    Personal loans usually don't demand collateral and have lower interest rates than most credit cards. When you borrow a personal loan to consolidate debt, you can choose a loan amount and interest rate that work with your budget. You'll also know the exact day your loan will be repaid. Consolidating high-interest credit card debt with a personal loan can even help your credit score rise.

  • Peer-to-peer loans – Direct loans from other individuals are known as peer-to-peer (P2P) loans. It lessens the financial institution's role as a middleman. P2P lending has become much more popular as a substitute for traditional funding.

    The interest rates are significantly higher than personal loans. It is because most of the risk, which banks or other financial institutions typically handle, is taken on by the investors in peer-to-peer lending platforms.

b) Secured debt consolidation loans

These loans are secured by collateral the borrower owns, like a home or car. In return, the asset serves as loan collateral.

A few examples may include:

  • HELOC - Home equity lines of credit, also called HELOCs, are secured by your house and provide you with a revolving credit line. You can utilize that fund for major purchases or pay off higher-interest debt from other credit balances like credit card bills. Compared to conventional loan types, a HELOC frequently has a cheaper interest rate than conventional loan types, and the interest may be tax deductible.

    With a HELOC, you can borrow money based on the equity you have in your home, and the house serves as security for the line of credit. Like a credit card, the available credit is restored when you pay down your outstanding balance. It means you can borrow against it once more if necessary. You can borrow up to the credit limit you set at closing for the duration of your draw period (usually ten years). The repayment period typically lasts 20 years and starts when the draw period expires.

  • Home equity loan - Also referred to as a second mortgage, a home equity loan lets homeowners borrow money by utilizing the value of their property. The loan is disbursed in one large sum and repaid over time in equal monthly payments.

    The loan uses the asset as security (collateral). The borrower uses the funds to pay off debts or cover significant needs like home renovations, repairs, or buying commodities. The repayment plan is predictable as the interest rate, and monthly installments are both fixed.

  • Cash-out refinancing - A cash-out refinancing option uses the equity you've achieved over time, providing you urgent cash and increasing your current mortgage loan amount. In other words, a cash-out refinance you to borrow more money than your current mortgage balance and keep the difference in your pocket. A cash-out refinance does not increase the number of monthly payments.

    Suppose you took out a mortgage to buy a $300,000 worth house. To date, you've already paid down $100,000, and thus, you still owe $200,000 to the lender.

    Suppose you need $50,000 cash to pay off your credit card debt. But how do you arrange it?

    With the cash-out-refinancing option, you can exchange a portion (or total share) of your equity and get a loan. The original $200,000 you owed on the house plus the $50,000 for your credit card debt would be covered by your new $250,000 mortgage. After a few days of the closing, your lender will disburse the $50,000 cash.

How to choose the best debt consolidation loan

Selecting the right debt consolidation loans will depend on your financial goals and how much your monthly payment is affordable to you. Consider the following factors before choosing the best debt consolidation loan:

  • Interest rates

    If the APR is less than what the borrower is now paying for their existing debt, and they should consider getting a debt consolidation loan. Most lenders provide loans with fixed and adjustable rates. The borrower’s debt-to-income ratio, current income, and credit score (VantageScore or FICO) will determine the interest rate.

  • Fees Structure

    The loan amount's origination fees range from 0% to 7%. A late payment fee may depend on the loan amount, or it may be a flat price of $25 to $45. A prepayment fee or early payoff charge may be a fixed amount, a portion of the loan amount, or the interest the lender will lose due to the early payment.

    Remember, not every lender levies fees. So, ensure you fully understand the terms before accepting the loan agreement on a personal debt consolidation loan.

  • Good customer service

    Check the rates at your neighborhood bank before choosing the best debt consolidation loans. Check out our top debt consolidation loan provider list if you're unhappy with your current lender.

  • Benefits and options for repayment provided by the lender

    Pick a lender that accepts payments via phone, website, or mobile app. Numerous lenders allow their clients to have creditors paid on their behalf and monitor services for identity theft and credit scores.

What are the best debt consolidation loan rates?

Depending on the borrower's specific credit history and the lending company they're working with, the advertised interest rate for debt consolidation loans might change. An average debt consolidation loan has an annual rate (APR) of roughly 22.59%.

Average debt consolidation interest rate (APR): By credit score and loan term:

Credit score 2 Years 3 Years 4 Years 5 Years Average APR
720 or above 17.08% 15.69% 13.35% 16.66% 15.85%
680 to 719 22.97% 21.49% 20.50% 21.11% 21.37%
660-679 26.94% 24.65% 24.68% 23.72% 24.45%
640-659 30.23% 26.53% 26.55% 25.24% 26.31%
620-639 35.59% 28.15% 29.44% 26.73% 28.19%
580-619 49.10% 30.28% 33.04% 27.83% 30.66%
560-579 86.98% 32.45% 36.86% 28.53% 35.02%
560 or below 97.92% 32.92% 34.61% 29.01% 35.13%

*Data courtesy of LendingTree: 272,872 anonymized credit applications for debt consolidation personal loans over the year previous to May 25, 2021.

How do debt consolidation loans work?

As a borrower, you might think, “where to get a debt consolidation loan? Multiple financial entities such as banks, credit unions, and online lenders provide unsecured debt consolidation loans. If approved, the lender will put the loan funds into your bank account, which you can use to settle your debts. Some lenders save you the step by sending loan proceeds directly to your creditors.

What to do next:

  • Verify your credit rating

    Most consolidation solutions demand a credit check. Unsecured debt consolidation loans don't need collateral. Therefore lenders focus more on your credit score when determining eligibility, along with other variables.

    So, it is essential to check your credit score regularly.

  • Determine the amount you'll need to borrow

    Add together all your desired debt consolidation payments each month. You may pay off payday loans, credit cards, and other high-interest debts using a personal loan.

  • Choose the APR you require to save money

    For a personal loan to be beneficial, your APR would need to be lower than the amount you are now paying on your obligations.

  • Compare APRs by securing loan approval from lenders

    You may prequalify with many lenders for a personal loan to learn about your prospective APR without affecting your credit score. It may enable you to compare potential loan offers before submitting a formal application.

  • Apply formally to a lender

    If accepted, the lender may deposit the money into your bank account immediately. You can utilize the cash to settle any debt.

    You can start monthly payments on the debt consolidation loan once you pay off all your debts. The monthly payment amount will be fixed for the duration of the loan, which is usually two to seven years.

Is taking out a debt consolidation loan a good idea?

Debt consolidation loans can be a wise choice for getting out of debt if you are eligible for one and can afford the monthly installments.

The benefits of consolidation loans are as follows:

  • Less interest will be due

    A debt consolidation loan's interest rate should be less than the total interest rate on all your current loans. It implies that the interest you pay on the amount you borrow will be lower.

  • You can eliminate debt more quickly

    With an unsecured debt consolidation loan, you might be able to pay off your debts more quickly, depending on how much you owe and the repayment period you select.

  • You can set aside money for fixed payments

    Debt consolidation loans feature fixed rates and monthly payments that won't alter throughout the loan, unlike other debts like credit cards, which makes budgeting simpler.

  • You'll have a specific target to reach

    When you combine several loans into one, you'll know exactly when you'll be debt-free, which can be motivating and aid in keeping up with the payments.

    Loan consolidation is one of many methods for paying off debt in full. It won't work if you have unresolved spending problems or tend to miss payments.

Alternatives to debt consolidation loans

There are various ways to pay off debt if a personal loan/debt consolidation loan is not approved.

  • Balance transfer card

    Borrowers with strong or excellent credit can transfer credit card debt to a balance transfer credit card. They can pay off the amount during the promotional 0% APR period, which can last up to 21 months.

    Most credit cards include balance transfer fees, which generally run between 3% and 5% of the transferred amount. Due to the initial introductory APR, borrowers may avoid taking credit card consolidation loans and opt for a balance transfer method.

  • Credit counseling

    Consider nonprofit credit counseling if your credit isn't great. These organizations can assist with the creation of a debt management plan. It combines your credit card bills into a single monthly payment at a reduced interest rate.

  • Simple strategies for paying debt:

    Not every debt repayment option requires a loan for consolidating debt. To decide which loan to pay off first, until you pay all debts, you can also initiate more straightforward payoff tactics such as debt snowball or debt avalanche approaches.

    A home equity loan, loan from retirement accounts such as a 401K loan, or bankruptcy are less common and riskier options for getting out of debt.

Debt Consolidation Loans: Frequently Asked Questions

Debt consolidation loans can help you manage revolving credit lines and expensive loans with high-interest rates. Credit cards, retail credit cards, gas cards, payday loans, and title loans are a few examples of these unsecured debts for which a borrower chooses a loan consolidation method.

Although debt consolidation may enable you to save money, this is not always guaranteed. To save money, you must consolidate your debt into a different type of financing with a lower APR than what you are presently paying on your bills. Consider your present credit card and loan agreements before you consolidate debt. Find out the APR you're paying currently so you may compare these financial options and choose ones that will save you money.

Debt consolidation may result in interest cost savings. To determine how much you can save with a debt consolidation loan, enter your current balances and interest rates into a debt consolidation loan calculator.

To qualify for a consolidation loan, lenders will consider your credit score, income, and debt amount. The usual minimum standards are a 600 FICO score and a debt-to-income ratio of 40% or below. Some lenders provide debt consolidation loans exclusively for borrowers with poor credit.

Consolidating whatever amount of debt is entirely up to you. However, consolidating will probably be more financially advantageous if you have a huge debt. It is because there can be costs and a credit check for new consolidation loans. So, getting a loan for consolidating debt might not be worth the trouble if you have a small amount that can be repaid in a year.

Borrowing money always has a cost. Finding the debt consolidation option with the lowest APR will help you save big over the long term. The interest rates and expenses associated with various loan consolidation alternatives vary. For instance, specific lenders of personal loans impose origination fees, but closing expenses and appraisal fees for a home equity loan are also chargeable. Even transferring a credit card balance may be subject to transfer fees.

Risks of debt consolidation include taking out a loan that is more expensive than your existing debt or failing to address the underlying causes of your spending, which results in you falling into even more debt.

Risks of debt consolidation include taking out a loan that is more expensive than your existing debt or failing to address the underlying causes of your spending, which results in you falling into even more debt.

You can set up automatic monthly payments out of your bank account when you want to make payments on a debt consolidation loan. You need to ensure that you have sufficient funds available every month. Additionally, it's also possible that you may write your lender a check each month. With a fixed loan term, you'll know exactly how much you owe each month and can assume the date when you'll pay off the loan entirely.

You can set up automatic monthly payments out of your bank account when you want to make payments on a debt consolidation loan. You need to ensure that you have sufficient funds available every month. Additionally, it's also possible that you may write your lender a check each month. With a fixed loan term, you'll know exactly how much you owe each month and can assume the date when you'll pay off the loan entirely.

Lenders run a hard credit inquiry when you apply for the loans to consolidate debt, momentarily lowering your score by a few points. If you make monthly payments on consolidation loans on time and in full, like other types of credit, it'll improve credit. However, skipping monthly payments on the consolidation loan payments could harm your score.

Your credit score might suffer due to your overall debt increase if you take out the credit card consolidation loan. However, only the loan will be in effect after bill consolidation. Consolidation ought to have a favorable overall impact on your credit as long as you can pay off your loan and avoid going into debt.

Creditors or credit reporting agencies do not directly mention debt consolidation on your credit report. Instead, when you apply for new loans to consolidate debt, you can experience a hard inquiry, which might remain on your credit record for two years. But it only has an effect on your credit score for a year.

What is the minimum credit score for a debt consolidation loan? Lenders often aim for a credit score between 580 and 620 when assessing loan applications. They, however, also consider other things, like the borrower's capacity to pay back the bill consolidation loans. It may be more challenging to be approved for a personal loan for debt consolidation if you have terrible credit. However, it is still doable, especially if you're willing to accept a co-signer or a secured loan.

Consider how to get personal debt consolidation loans for bad credit:

While getting a personal loan with a low credit score is not impossible, you may need more effort. The process may vary based on your particular credit score and lender, but the general steps are as follows:

  • Verify your credit score

    It's imperative to verify your credit score immediately through a credit-providing website or your credit card issuer before you begin your search for the finest lender. It will help you determine what you are and are not eligible for. Additionally, you should look for any errors connected to your credit score, such as a debt that is not yours.

  • If you need to improve your credit score

    Take the time to raise your credit score if you discover it is too low before applying. Paying off unpaid obligations and lowering your credit utilization are two easy strategies to repair your credit.

  • Analyze your budget

    Before searching for the ideal lender, assess your financial situation and determine the maximum loan amount you can afford. If you take out a too large loan, you can struggle to make future payments and hurt your credit even more.

  • Prequalify with multiple lenders

    Some lenders allow you to prequalify. It will let you see if you can qualify without a hard credit check and what terms you would receive once approved.

  • If needed, include a co-signer

    Consider adding a co-signer if you need to strengthen your application and get better terms. A co-signer is a second party who guarantees that you will repay the loan if you cannot do so, lowering the risk you represent to the lender.

  • Send your application

    Apply online or in person once you've identified the ideal lender for your needs. Get ready to share details about yourself, including your Social Security number (SSN), home address, and income level.

  • Pay off your loan

    It's time to repay your loan after your lender approves and releases the funds. Setting up autopay is a specific approach to ensure you never miss a payment.

Managing debts with an unsecured consolidation loan can be a wise choice if you want to pay off your obligations quickly. You can choose a brief loan period when consolidating with a personal consolidation loan, making your debts easier to repay. Additionally, even if you make the same number of payments toward your debt each month, you can pay off your obligations more quickly if you obtain an APR lower than the one you are currently paying.

With consolidation loans, there are no credit restrictions, introductory rates, or revolving balances to worry about, just a fixed rate and a manageable monthly payment that you select in advance. As a result, you can start paying off your debt right now. Once you lock in your rate, more interest won't be added to your loan; therefore, almost all of your monthly payments will reduce your loan amount and pay off what you owe.

A Military Debt Consolidation Loan (MDCL), commonly referred to as a VA Consolidation Loan, is available to veterans who hold Veterans Affairs (VA) loans. The loan serves as a cash-out refinance. Conventional personal loans are available to veterans who don't have VA loans to consolidate their debts.

Pentagon Federal Credit Union, Navy Federal Credit Union, and USAA provide the best military debt consolidation loans. Details as follows:

Debt Consolidation Loans Borrow Months Fees APRs Range
Pentagon Federal Credit Union $600 to $20,000 Over 36 to 60 No origination fee 6.49% - 17.99%
Navy Federal Credit Union $250 to $50,000 Up to 60 No origination fee 7.49% - 18%
USAA $2,500 to $5,000 Over 12 to 48 No origination fee 7.24% - 17.65%

These personal loans assist veterans and active duty military in consolidating their debt and paying it off over prolonged periods at lower interest rates. The official "Military Debt Consolidation Loans," or MDCL, are also available to debt holders who have home loans through the Department of Veterans Affairs.

Service members and veterans can get personal loans at affordable rates from several financial institutions backed by the military. These loans are the ideal option for people who want to consolidate their debt without using the equity in their property.

The last resort for controlling your debt should be bankruptcy. A better alternative to bankruptcy is debt consolidation, which over time, can also help you raise your credit score and enhance your credit history. Your credit report will reflect a bankruptcy for up to 10 years.