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A new credit card here, a personal loan there, maybe a line of credit – it’s easy to end up with a variety of balances over the years. These are often unsecured debts with high interest rates and different repayment terms.
Debt Consolidation Loans are an option to consider if you need help simplifying your debt. While not for everyone, these loans can allow you to lower interest rates, make it easier to pay off balances, and in some cases lower your monthly payments.
Read on to find out how to find the best debt consolidation loan for your financial situation.
What is a debt consolidation loan?
A debt consolidation loan is an unsecured personal loan that allows you to consolidate various debts, including credit card balances and loans or lines of credit, into a single balance. If you have four credit cards that you are paying off, for example, you can use a debt consolidation loan to pay off your credit card balances and then start paying off the loan.
Alternatively, some lenders may reimburse your creditors directly, so you will need to provide them with loan balances and account numbers.
As is the case with almost all credit-based products, the lowest interest rates on debt consolidation loans are generally available to those with the best credit scores. In general, you can expect APRs to start as low as 5.99% and reach 35.99%.
With Credible, you can easily compare the rates of different lenders at once.
How Do Debt Consolidation Loans Work?
To take out a debt consolidation loan, you will need to submit an application and meet the borrowing requirements of the lender. Once you have applied and qualified, you will receive your terms including a loan amount and a fixed interest rate. Your lender will provide you with a schedule for your loan, including a monthly payment amount based on the term of your chosen loan.
In some cases, this new payment may be less than the combined amount you paid on your existing debts. While a lower payment can improve your cash flow, be aware that it can cost you more interest over the life of the loan, and you may need more time to get out of debt. If you agree to the loan terms, you will then sign the fund closing documents and they will be disbursed.
Depending on the lender, there may also be loan closing costs and other costs to consider, such as an origination fee or a prepayment penalty. These can affect the total cost of your loan, so do the math to make sure that even with these fees (if any), you’ll still be saving money in the end.
Where Can I Find a Debt Consolidation Loan?
Debt consolidation loans are offered by a variety of different lenders, from banks and credit unions to credit card issuers. Choosing the right one for you depends on your needs and your credit history.
You may want to consider a debt consolidation loan from your existing bank or credit union. Since you have an established relationship there, it may be easier for you to get approved and funded, and managing your loan may also be easier. Just make sure the interest rates, fees, and terms are in line with what you see elsewhere, so you don’t pay more for the sake of convenience.
You can also opt for a debt consolidation loan through a credit card issuer. Credible partner lenders like Avant, Best Egg and Discover offer debt consolidation loans of up to $ 35,000 with a simple online application. The rates are as low as 5.99%, depending on the lender you choose and your FICO score. People with excellent credit will generally be offered much lower rates than those with bad credit.
Interested in consolidating your debt? Credible makes it easier and faster to find the best debt consolidation loans.
How Can I Get a Debt Consolidation Loan?
Getting a debt consolidation loan is a fairly straightforward process if you meet the requirements of the lender.
- Comparison shop. First, you will want to shop around to find the best loan rates and terms. Credible is a great place to start, as it allows you to see multiple lenders and get details of their loan products all in one place.
- Pre-qualified. You can often prequalify with many lenders, especially if you go through a platform like Credible. Prequalification allows you to compare rates and get a feel for your likelihood of approval, with just a no-obligation, no-obligation credit check.
- Apply. Once you’ve chosen a lender and shortlisted, it’s time to apply. You will need to provide personal information, such as your social security number, address, date of birth, email, and income. The lender will usually perform a credit check at that time, and you will have a final decision.
- To close. Now, it’s time to take out your new loan. Your lender will send you closing documents outlining your loan amount, interest rate, repayment terms, and applicable fees. Once your loan documents are signed, your funds will be paid (either to you or directly to your creditors). Funding times will vary, but you may be able to receive your loan funds within a business day or, in some cases, the same day.
How Much Can I Save With A Debt Consolidation Loan?
Debt consolidation loans can be a great way to save money on paying off your debts, usually by lowering your overall interest rates. The amount you will save depends on your particular situation.
For example, let’s say you have $ 10,000 in credit card debt at a current 25% APR. If you only make the minimum payment of $ 309 per month, it will take you about four and a half years to pay off the balance and will cost you a total of $ 16,808 (of which $ 6,808 is interest only).
With a debt consolidation loan, you can reduce that APR to 5.9% and your monthly payments to just $ 193. Although it may take a few more months to pay off the debt, you will only pay $ 1,572 in interest – a savings of $ 5,236!
|Credit card||Debt Consolidation Loans|
|Amount of the loan||$ 10,000||$ 10,000|
|Interest rate||25% APR||5.9% APR|
|Minimum monthly payment||$ 309||$ 193|
|Repayment period||55 months||60 months|
|Total interest paid||$ 6,808||$ 1,572|
What Factors Should I Consider In A Debt Consolidation Loan?
Every debt consolidation loan is different, so you will need to review and compare each of the factors involved to make sure that you are choosing the right loan for you.
- Interest rate and APR: The interest rate and the APR, or annual percentage rate, of your loan will dictate how much that loan ultimately costs you. The lower the rate, the less you will pay. When consolidating debt, choose a loan that lowers your effective interest rate.
- Closing costs and fees: Some lenders may charge setup fees, administration fees, and other closing costs, which will be added to your total loan fees. You may need to factor these costs into the total amount borrowed to ensure that your final funds disbursed are sufficient to cover your debts.
- Term of the loan: The length of your loan will determine the time you have to pay off the debt and the amount of your monthly payments. Balance your debt repayment goals against your monthly budget to find the length that works for you.
Alternatives to debt consolidation loan
Here are some alternatives to debt consolidation loans to consider if you want to pay off your existing debt faster or for less interest.
0% introductory APR by credit card with balance transfer
The first option is to use a 0% balance transfer card. With a balance transfer credit card, you can transfer your debt from one account to another, taking advantage of an interest-free introductory opportunity. Just be sure to pay off the balance before the introductory period ends, or your remaining debt will start to bear interest at the card’s regular rate.
Another option is to tap into the equity in your existing home through a home equity loan. This can be a good option if you have good credit, and even if you have fair credit. A home equity loan allows you to use the equity in your property. Just be aware of the potential pitfalls when using a home equity loan to pay off debt. This method turns your unsecured debt, such as credit card balances and medical bills, into debt secured by your home. If you default on the loan, you could lose your property.
Debt consolidation loans can be a key part of any debt management plan. If you are juggling multiple debt balances, especially higher interest rates, these unsecured personal loans may be worth considering.
Check out Credible to compare debt consolidation loan rates and find the one that’s right for you.
About the Author: Stephanie Colestock is a Washington, DC-based writer with over 10 years of investment, business and personal finance writing experience. His contributions include outlets such as Yahoo! Finance, MSN, Investopedia, Credit Karma, Credible, and more.
She holds a bachelor’s degree from Baylor University and is in the process of obtaining her CFPÂ® certification. When Stephanie isn’t writing about finances, you can find her traveling, reading a good book, or exploring the outdoors with her husband and two young sons. You can find it on Twitter Or on LinkedIn.