Want to pay off your debt once and for all? Consolidating your debt may be easier than you think.
Take advantage of this guide to discover and select the right lender to suit you. All of the following companies offer loans that are designed for paying off your existing debts. This kind of loan entitles you to pay monthly, usually at a reduced interest rate compared to your current loan. In this article, we have looked at the process of applying for this mortgage and the expected interest rates.
What is a debt consolidation loan?
“It is a measure of debt relief whereby you can get a new loan to pay off your debts in whole or in part,” said Karen Masselink, certified financial planner at RBC. “Sometimes the overall amount to be paid is reduced due to the lower interest rates, and borrowers are frequently given additional time to pay off the outstanding amount.”
Debt consolidation makes the repayment process easier by merging various bills into a single loan payment. It encompasses these sorts of debts:
- Credit card bills
- Payday, personal or educational loans
- Medical expenses
How do debt consolidation loans work?
This consolidation may be accomplished through credit card balance transfer or through personal loan. If you take out the second option, you will continue to pay the whole amount of your debt, but your payments will be reduced and your credit protected. Generally, the interest rate on it is lower than on a credit card, and the payback period can range from 36 to 60 months, meaning that you can rely on smaller monthly payments for a longer time.
“Banks, financial cooperatives, independent lenders or other funding institutions offer a variety of debt consolidation loan amounts,” said Masselink. “Your payment amount and credit availability are based on various factors, among them your overall debt amount and your creditworthiness.”
Difference between debt settlement and debt consolidation
Another famous way to relieve debt is through debt settlement, which differs significantly from consolidating debts. With consolidation, you owe the full amount of your debt. Debt settlement seeks to lower the debt owed through negotiations with your creditors. Simply put, consolidation turns the terms of your debt around, while debt settlement cuts your debt.
Requirements for debt consolidation
The lender sets specific criteria for debt consolidation, but they generally include the following:
- Track record of credit
- Attestation of income
- Unsecured debt of more than $5,000
Most of the time, lenders of this type of loan require at least a 580 to 640 credit score to be eligible.
How to get a debt consolidation loan?
Taking out debt consolidation loans is a process that needs thorough preparation. Complete the following steps to get the right one for your needs:
Review your debts
Identify your loans and credit card balances and calculate a budget and repayment plan. The funding will help you determine the maximum monthly amount you can handle, while the repayment plan will encourage you to put money aside.
Determine which loan is right for you
With the assistance of your financial counselor or consolidation lender, identify the loan model for which you qualify and which will give you the best repayment options. After evaluating your alternatives for debt relief, if you are resigned to getting a loan, choose either a secured or an unsecured one.
- An unsecured debt consolidation loan has no assets or personal possessions as collateral. It is the most common among debt consolidation lenders, even though the interest rates charged on this loan are usually above those of a secured loan.
“The decision to grant credit and the interest rate are based on your creditworthiness, earnings and debt/income ratio,” said Brian Mirza, credit analyst at Bank of America. “Good credit is generally required to get approval for unsecured personal loans to consolidate debt.”
- A secured debt consolidation loan is based on assets or properties, like a house in the case of a mortgage to consolidate debt. It’s easier to obtain such a personal loan than an unsecured one, but the risk is higher because your assets might be seized in the event you default. Do not apply unless you are sure that your monthly payments will be made on a regular basis.
Seek out a trusted debt consolidation firm
Browse the sites and make a comparison of their rates and terms. Find out what requirements each lender has for loan approval. Not all lenders are alike, so use the tips below to find a legitimate and trustworthy one.
- Review memberships: Go to organizations such as National Foundation of Credit Counseling, American Fair Credit Council or Financial Counseling Association of America to check if the firm is on the list. To receive accreditation from the American Fair Credit Council, it needs to be certified as compliant with reasonable consumer protection practices.
- Ask about reviews: Ask your relatives and friends about their experiences, or read online reviews of leading debt consolidation firms to find out what impressions real consumers have had with them.
What to Expect in Terms of Rates
With debt consolidation loans, interest rates differ from lender to lender and are determined by factors such as your creditworthiness, the amount of money you are lending and the length. They can be either fixed or variable. If you are concerned about interest rates going up on long-term loans, you should consider a fixed rate. A variable rate loan has a lower APR than a fixed rate, but it is calculated according to a benchmark rate set regularly by the banks. In other words, your loan’s interest rate will likely fluctuate up or down over the years, creating financial uncertainty.
Your credit rating is the deciding factor when lenders evaluate the rate you should receive. Debt consolidation loans range in rate from 4% for excellent credit borrowers to 36% for poor credit ones. Many lenders require a minimum of 580 in creditworthiness for borrowers.
“Your credit rating is the deciding factor when lenders evaluate the rate you should receive,” Mirza said. “Debt consolidation loans range in rate from 4% for excellent credit borrowers to 36% for poor credit ones. Many lenders require a minimum of 580 in creditworthiness for borrowers.”
Estimated debt consolidation loan rates
| Credit score | Score range | APR average | APR estimate |
| Poor | 300 – 610 | 28% | 14% – 37% |
| Fair | 610 – 680 | 22% | 7% – 31% |
| Good | 680 – 730 | 18% | 6% – 29% |
| Excellent | 730 – 850 | 14% | 4% – 20% |
Are there alternatives to debt consolidation?
Consolidating debt is one of many solutions in the field of debt relief. Other standard debt management measures and programs involve credit counseling and debt settlement. In addition, there are DIY debt solutions such as snowballing and avalanche methods. Finally, going into bankruptcy can be an option for some individuals.
Is debt consolidation wise?
Similar to any solution for reducing debt, there are many advantages and disadvantages. However, this solution can be attractive if you want to reduce your debt load or give yourself more time to repay and regain control of your money. Having a new loan to pay off multiple debts also reduces the stress of dealing with several creditors.
Does a loan like this affect your credit rating?
By taking out a new loan, the effect on your score may be short-lived. On the other hand, using debt consolidation will not negatively impact your score for a long time if you regularly pay and don’t miss a payment.
Shutting down credit card accounts decreases your credit availability and increases your credit utilization ratio. Higher credit utilization ratios mean a lower credit score. It is okay to maintain active credit accounts even after they have been paid off, but avoid adding new debt.
Disclaimer : All loans are subject to credit and underwriting approval. ConsumerAware.org is an information blog and loan search platform, not a lender. ConsumerAware.org only works with partners and advertiser networks that comply with laws and regulations of Australia, United Kingdom, United States, New Zealand and Canada. Loans range from $1,500 to $65,000 with terms ranging from 12 months to 60 months or more. Annual percentage rates (APRs) range from 3.6% to 19.9% and depend on the assessment of your credit profile. For example, for a $3,500 loan paid monthly over 48 months, a person would pay $80.60 per month for a total of $3,868.80 over the course of the entire loan period.
