Debt Consolidation Loans to Pay Credit Card
No matter how disciplined you are with your budget, sometimes you can’t help but go on a bit of a splurge. And if you have credit readily available, you may find it harder to even think twice before spending what you haven’t earned. When things get out of control, you could be in for a lot of trouble. So, in this article, we take you through one of the common ways to put a stop to a worsening credit card problem, and that is through a debt consolidation loan.
Here you’ll learn everything you need to know about this loan type so you could decide whether you should apply for one or not.
But before you read the rest of the contents, here are the best credit card debt consolidation lenders available in the market:
- Best Rate
- Min. Credit Score
- Max Term
- Max Amount
LightStream
- 5.95%
- 660
- 7 years
- $100,000
Payoff
- 5.99%
- 640
- 5 years
- $35,000
SoFi
- 5.99%
- 680
- 7 years
- $100,000
- Best Rate
- Min. Credit Score
- Max Term
- Max Amount
Best Egg
- 5.99%
- 600
- 5 years
- $50,000
PenFed
- 6.49%
- 700
- 5 years
- $20,000
Upgrade
- 6.94%
- 680
- 5 years
- $50,000
- APR range
- Fees
- Terms
- Amounth
- Unemployment protection
Bank 1
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Bank 2
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Bank 3
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Table of Contents
How Debt Consolidation Works?
A debt consolidation loan is a type of credit offered by banks or credit institutions that helps you streamline credit card bills, auto loan payments, personal loan payments, and other debts into a single loan with a single monthly payment.
It works with you applying for another loan and using the fresh funds to pay off all you owe. In turn, you’ll have a new financial commitment with different terms and a monthly installment that is usually lower than your prior collective payments to all your debt sources.
If you’re applying for a consolidation loan for credit card bills, then it’s much the same product, but its focus is on accomplishing repayments towards all your credit card debt.
Can I Get a Loan to Consolidate Credit Card Debt?
The quick answer is yes. You most certainly can. Consolidation loans for credit card debt are available to you as long as you meet the qualifying requirements (this is expounded further in the next few paragraphs). But, essentially, such a credit type is within your reach if you possess a good credit score and credit history.
In some instances, when you fail to satisfy those two criteria, some lenders offer you the option to ensure repayments through a co-applicant or collateral.
Since most personal loans are unsecured (meaning that there’s no other guarantee of you paying back the loan other than your creditworthiness), a co-applicant or collateral will give the lender confidence in letting you borrow their money.
Things to Consider
But before you send your application to the lenders we have on the list above, you must first consider a few things about debt consolidation loans for credit card debt.
Can you get a lower interest rate and a lower monthly?
Needless to say, it would only make sense to avail of this loan type if you can secure a lower interest rate and reduce your monthly payments. Therefore, it is crucial to account for all your existing liabilities, factoring in each and every debt source because the last thing you’d want to do is to commit to another liability that fails to cover all that you need to pay. Once you’ve determined that you could get a sweeter deal with a consolidation loan, then only can you pull the trigger.
Is there a real need for it?
Sometimes consolidation loans are a lifeline from finances that have gone out of control. But it is not always the best solution, especially if you have loan payments set to mature relatively soon or don’t have that big of a debt load. If this is the case, it may be better for you to put up with the loan payments from your income until you pay it entirely. This is because a new loan, as mentioned, means new terms, and this would mean extending the duration of your repayment schedule.
Are there better alternatives?
Lastly, if you’re only grappling with credit card debt, other solutions may be more appropriate in your situation (more of this in a later paragraph). Some financial products are ideal for managing credit card bills instead of loans because of the extra benefits they provide.
Requirements to Qualify
After considering all the factors and you’ve decided that a debt consolidation loan is what will help you in your situation, this section will guide you through the requirements to qualify.
First, lenders would need to verify your identity, address, and income. The document you need to submit to verify your identity can be a copy of your passport or individual taxpayer identification number (ITIN).
A valid proof of address is mostly utility bills, a lease agreement, voter registration card, or home insurance. And proof of income can be pay stubs, bank statements, and past tax returns.
Along with this, you must have a good credit score, but it doesn’t have to be immaculate. If your score meets the lender’s required minimum, then there’s a good chance that you’ll gain approval.
A form of identification can be driver’s license. Sometimes, your Social Security number is enough.
Pros and Cons
It is also essential to learn about the advantages and disadvantages of a debt consolidation loan to gain a complete picture of how this loan type can best serve you.
| Pros | Cons |
|---|---|
|
Saves you money: U.S. News notes that the credit cards on their database have an average Annual Percentage Rate (APR) of 15.56% to 22.87%. So, if you have multiple credit cards with unpaid balances, you can just imagine how much your debt would balloon if left unchecked. Consolidating all your bills would not only help you escape high monthly interest charges, but it also lowers the overall cost, thereby saving you a lot of money in the process. |
Your debt doesn’t go away: Despite seeming like a magic bullet to getting out of debt, consolidation loans for credit card debt merely adjust the terms of your liabilities. In other words, you're not out of the woods yet. When you consolidate credit card debt, you pay it all off, but you also acquire a new loan that must be paid back. And guess what? That new loan still comprises the amounts you have yet to pay from your credit cards. |
|
Helps you avoid getting penalized: Another benefit to combining all your credit card bills into one loan is that it helps you avoid missing due dates. Different cards will have different due dates, and missing a single one would mean getting charged with a late fee, a potential penalty APR, and interest charges.But if you have only one loan to pay, it will only have one due date, which makes payments a lot easier to handle. |
You prolong debt payments: As mentioned, debt consolidation also means an extension of your repayment schedule. And the reason why is that for your lender to provide you a lower monthly, they'd often need to readjust your duration of payments to a longer schedule. |
|
Organizes your finances: Lastly, if you have only one loan to think about, it gives you much more peace of mind because your finances are more manageable. It's like departing from multi-tasking (which everyone stinks at) to a single task to focus on. When you have less to concern yourself about, it's much easier to take care of your money and your life for that matter. |
|
Average Debt Consolidation Loan Rates
Many factors determine what rates you’ll ultimately get, and a large part of it has to do with your credit score and history. Of course, the better you have, the more attractive your rates are going to be.
And like we stated earlier, you can apply with co-applicants or with collateral. Including this in your application will not improve your chances of snagging the loan you seek, but it will also help you secure favorable interest rates.
As of the moment, the average debt consolidation rate is around 6.2%, that is, if you possess an excellent credit score.
if your score falls below 640, you may be approved of the loan but with an APR possibly higher than 30%.
Other Financial Alternatives
If, for some reason, you’re unable to get the financing you need through a debt consolidation loan, you should know that there are alternative solutions to get a handle on your debt dilemma.
One example is a balance transfer. A balance transfer is a lot like a debt consolidation loan: you combine all credit card debt into one. However, the exception is that instead of a loan, you transfer everything into a new card.
The advantage of this is that the new card is that some promotional offers would allow you to pay 0% APR on the transferred balance for up to 21 months. And along with it comes other credit card perks associated with the new card.
However, if you still can’t get your hands on this option, the last resort might be a debt settlement or declare bankruptcy. With these, you’ll be able to settle your loan amount to something much less or be forgiven altogether. But do note that if you head this route, it could be so much harder for you to apply for a loan again in the future.
Frequently Asked Questions (FAQ)
Yes. A personal loan is suited for several purposes, including consolidating student loans and credit card debt.
It will temporarily affect your credit score, but as you continue to make payments towards the new loan, you’ll see it improve over time.
The first thing you need to do is list down all your debts, their rates, and the amount you pay each month for each one. Get the total amount, so you’d know how much to borrow, and then find a lender that can give the best rate and terms.
It sometimes is because it frees you of any debt, which saves you money in the long run, and it might even improve your credit score. However, the disadvantage is that you might pay an early settlement fee or a prepayment penalty fee.
The amount you can consolidate is based on the amount you can borrow from your broker. Some lenders can let you borrow up to $100,000 on an unsecured personal loan, but you have to have an excellent credit score to obtain such an amount.
