If you want to manage your debt in order to lower the interest and save on monthly payments, a debt consolidation loan is a right option for you.
Debt consolidation loans allow borrowers to use a fixed-rate, unsecured personal loan to pay off or reduce multiple unsecured debts more easily.
These loans are offered by traditional brick-and-mortar banks, credit unions and online lenders.
What is Debt Consolidation?
Consolidating debt is the process of combining multiple debts from credit cards, high-interest loans, and other bills into one monthly payment.
Debt consolidation solutions may lower your interest rate, which can help you save money on interest, lower your monthly payments, and pay down debt faster.
Debt Consolidation With a Personal Loan
While there are debt consolidation options available for people with “poor” scores, they often come with high interest rates that may be higher than the rates of your current loans.
A good option would be to look at online lenders like Upstart. Upstart looks at alternative data, beyond credit reports and scores, to determine whether a person qualifies for a loan.
Factors like job history, income and education influence whether a candidate qualifies for a loan and a lower rate.
APR: 13.49% – 35.99% APR depending on creditworthiness
Term: 24-48 months
Upstart offers loans of up to $50,000 that can be used to pay off credit cards and consolidate other types of debt. Upstart has an easy application process and taking out a loan will not affect applicants’ credit scores.
APR: 5.99% – 16.84% APR depending on creditworthiness
Term: 24 months
If your credit scores are in the good to exceptional range, SoFi provides loans from $5,000 to $100,000 without charging application or origination fees. SoFi is a great option if you need a large loan and can stand to wait a few days for your funds to arrive.
Debt Consolidation Options for Military Members
Obtaining a personal loan from a military lender is one option for military members trying to consolidate their existing debt.
Military lenders will consider applicants with a lower score, but may still find people with a severely compromised credit history risky.
APR: 5.32% – 31.24% APR
Term: 36, 48 or 60 months
Prosper works with members of the military to provide fixed-rate loans without requiring the borrower to visit a physical bank location. Prosper provides unsecured loans as large as $40,000 for those with good to very good credit scores.
How To Get a Debt Consolidation Loan
- First, decide how much you need to borrow and what you can afford to pay each month. Use our calculator to determine the cost of different loan scenarios.
- Then, shop around for the best loan rates and terms.
- Once you’ve chosen a lender, fill out the application and provide the requested documentation. An application will result in a “soft pull” on your credit report, which does not hurt your credit score. If the lender preapproves you and you agree to a loan offer, it will do a “hard pull” on your credit report, which does affect your credit score slightly.
- Once you are approved, you will receive the loan funds. Technology makes it possible to apply for a loan, get approval and have the loan money deposited into your account in one to several business days. The time frame differs with lenders, though, and it can take a week or longer, depending on the loan and other factors.
- Repay the loan within the allotted loan term.
Benefits of a Debt Consolidation
May be able to save money on interest
- Possibly lock in a lower interest rate with a consolidation loan
- Get a low promotional APR on your credit card with a balance transfer
Eliminate debt faster
- Put less money toward interest
- Pay down your principal sooner
Consolidate monthly bills
- Simplify and streamline your finances
- Consolidate your debt and make fewer payments each month
Pay off debt over time
- Choose your loan term or balance transfer promotional period
- Create a monthly payment plan that works for you
Downsides of a Debt Consolidation Loan
- You run the risk of going into deeper debt. Unless you can rein in the spending that got you into debt in the first place, a debt consolidation loan will not help you. If you use the loan to pay off your credit cards then start running up card balances again, you’re digging yourself into a deeper debt hole.
- The monthly payments can be high. Because you are paying off several debts with the loan, your monthly payments can be steep. It’s not like making minimum monthly payments on several credit cards. You have to be sure you can handle the payments until the loan is repaid.
Alternatives to Debt Consolidation
1. Credit Card Usage
Responsible credit card usage can help make sure that you don’t rack up too much debt and don’t get behind on payments. Knowing how to pay down credit card debt can be extremely helpful and can help you save money over time.
If you are overwhelmed with debt and see no way of paying it off, bankruptcy may help you find relief. Filing for bankruptcy, however, will remain on your credit file for seven to 10 years and may affect your ability to obtain other loans in the future.
3. Debt Management Plans
Before you consider applying for a loan, one option is to use a debt management plan to consolidate your monthly debt payments. With a plan like this, you must first find a credit counselor and work with them to formulate and stick to a repayment plan.
Once you and your counselor agree on a plan, they will often try to negotiate with your creditors to see if they can get you a lower monthly payment and sometimes a lower interest rate.
4. Creating a Budget
Creating a budget and monitoring your expenses is a vital step in understanding how much you can afford to pay toward existing debt each month.
Once a budget is in place, you will be able to set aside a set amount toward your debt payments and inch toward your goal of paying your loans off.
1. Can debt consolidation help me pay down debt faster?
Debt consolidation may help you lower your monthly payment or under certain circumstances decrease the amount of interest you pay, but this depends on your financial situation and your ability to make your monthly payments.
2. What kind of debt can I consolidate?
Whether you choose a loan or a balance transfer, you can consolidate credit cards, store cards and gas cards; high-interest loans; medical bills and more. Separately, you can also consolidate your student loan(s) by refinancing federal and private student loans into one loan with one monthly payment.
3. What kind of interest rates can I get with a balance transfer?
A balance transfer offer has a low promotional or introductory rate. Rates can be as low as 0%, depending on the offers that are available to you.
Debt consolidation loans can save you money in interest charges, make budgeting easier and reduce bill-paying stress. If not used wisely, though, a debt consolidation loan can add to your troubles.
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