Here is a summary of the features of each loan covered here. They may be different in your state and are subject to change frequently. So, please check the lender’s site for updated information.
||Min. FICO® score
||5.99% to 35.99%
||36 or 60 months
||36 or 60 months
What is a Debt Consolidation Loan?
A debt consolidation loan combines multiple debts like credit cards, personal loans, medical and others into one loan. It allows you to pay all debt included in the loan off at once in a single monthly payment over the term of the loan. Often, its APR is lower than a single credit card added to the loan but not always. That depends on your credit.
How Does a Debt Consolidation Loan Work?
Debt consolidation loans combine all the debts included in the loan into one loan at a fixed APR with a predictable payment each month. Often, that payment is larger than any one of the debts included, but smaller than paying each monthly payment separately. This can increase your cash flow and allow you to preserve or rebuild your credit as long as you make your loan payment on time each month.
What Are the Reasons for Debt Consolidation?
There are multiple reasons for getting a debt consolidation loan. Here are some that you might consider as you look at this option for paying your debt.
- Multiple debts gone: Manage all debt repayment in one loan
- Amounts available to borrow: Ability able to borrow enough cover all debts is possible
- Flexibility loan funds use: Use loan proceeds to pay different debt types in one loan
- Set time frame to pay off all debts: Consolidated debts get paid by same date
- Reduce payment sizes: Smaller loan payment than a current monthly debt payment
- Better terms: Get better terms than on current credit cards or personal loans
- Eliminate high interest debt: Consolidate at lower interest than credit cards or loans
- Predictable payments: Make same payment monthly for the duration of loan
- Locked in interest: Get the interest rate locked for the loan’s duration
- Unsecured and secured loans available: Secure loans on collateral like vehicles
- Improved credit score: Debt consolidation can lead to higher FICO score
- Better cash flow: Lower payment on all debt can lead to more cash monthly
What Are The Dangers of Debt Consolidation Loans?
There are some risks involved in getting debt consolidation loans that you should contemplate before you do. They include the following, but examine your situation for others.
- Ignoring root causes of debt: Not considering and addressing the reasons debt is high
- Running up debt again: Maxing out credit cards and getting new loans after consolidation
- Rushing debt consolidation: Not researching it well and planning repayment strategy first
- Making wrong choice: Choosing the wrong debt consolidation loan or lender
- Missing payments: That can lead to damaged credit and inability to borrow
- Not considering debt’s full cost: Not identifying fees that raise the debt’s cost
- Prepayment penalties: Not knowing if there prepayment penalties and what they are
- Taking Securing consolidation loans: Using vehicles, houses, or other assets may lead to their loss
- Mistaking debt settlement for debt consolidation: It’s essential to know the difference
- Not considering other payoff options: Are debt consolidation loans the best option?
- Adding hard inquiries to credit: Rate shopping incorrectly can lead to damaged credit
How to Qualify For a Debt Consolidation Loan
Before you apply for debt consolidation loans, you should know how to qualify and only apply for those for which you qualify. That way, you reduce the likelihood of getting declined for loans, which makes it harder to get others once lenders see declined applications.
- Show ability to repay: Have all income documents ready that show capacity to repay
- Check your credit report first: Find and fix mistakes to for an increased credit score
- Improve debt-to-income ratio: Pay down or off any debt possible before applying
- Research lenders by credit score: Find those lending in specific credit score ranges
- Identify potential co-signers or co-borrowers: Ask their permission before starting to apply
- Contact lenders with questions: Do this before pre-qualifying to ensure it’s the right lender
How to Get a Debt Consolidation Loan
Once you know you qualify for certain debt consolidation loans, use these criteria to secure the loan that’s best for you and your unique financial situation.
- Get pre-qualification: Choose lenders that only require soft credit pulls
- Credit score: It’s important to only choose lenders that accept applicants in a specific credit score range
- Add a co-signer or co-borrower: Lean if this is allowed before applying
- Set borrowing limit: Decide a maximum borrowing amount repayable with all other bills
- Check all criteria: Formally apply only to those that fit certain criteria based on their features
- Have documentation ready: Be ready to provide additional documentation lenders require
Best Ways to Consolidate Debt
Write about other ways of financing you can use to consolidate debt besides loans (but mention debt consolidation loans in this list). Write briefly and concise, each way in bullet point
- Balance a transfer credit card–find one that allows you to transfer all credit card debt to one card.
- HELOC (home equity line of credit) or refinancing your house–use a lower interest line of credit or do a cash-out refinance to pay your debts.
- Credit counseling debt consolidation–many are nonprofits that negotiate with your creditors to help you pay debt. Make sure it’s not debt settlement your doing, which can hurt your credit.
- 401K loan–take funds from your retirement account to repay your debt. Understand the tax consequences of this method and how it will affect your retirement plans.
Getting a debt consolidation loan is a big decision. It takes significant careful research to identify the best personal loans for debt consolidation based on your finances and planning to choose the best place to consolidate debt for your needs. Here, we’ve provided you some of the top rated debt consolidation companies for all credit types and scores. If you take your time and avoid the mistakes identified above, you should be able to get a debt consolidation loan that improves your financial picture.