Consolidating all your credit card bills and loans into one credit is an excellent debt solution, especially if you can obtain a lower interest rate. And this article helps you understand what this loan type actually is and how you can secure the lowest rate possible when you apply for one.
But before you run through the rest of the contents of this page, here first are the top lenders that offer the lowest rates on debt consolidation loans that you can consider:
Debt consolidation is the process of streamlining multiple debts (e.g., credit card bills, auto loans, student debt) into a single payment. When you consolidate all your debt, you essentially apply for another loan, which is usually an unsecured (no collateral) personal loan, from a bank or credit institution. You would then use the fresh funds to pay off all that you owe.
And the new loan you obtained will generally have a lower interest rate and a lower monthly payment, which is by design to help you save money on high-interest rates and afford you a better hold of your finances.
Firstly, to qualify for a low-interest debt consolidation loan, your credit score has to be pristine — upwards of 700 is ideal. And this is because lenders have no form of security that you’ll pay back the amount other than your creditworthiness, which is often judged by how good your credit is. So, for them to extend a low-interest rate loan to someone with a poor credit score is too risky.
However, there is an option to include a co-applicant through a joint loan for debt consolidation. In doing so, you’d be able to improve your chances of snagging a low-rate loan, especially if your co-borrower has a significantly better score than you.
Aside from this, lenders also need to verify your identity, income, and address. So, along with your application form, you also need to submit identity proof, which can be a copy of your passport, driver’s license, or tax ID. For your income proof, you can submit pay stubs, bank statements, and past tax returns.
Here’s a quick summary of a debt consolidation loan’s pros and cons to help you decide if this credit type is for you:
Pays your debts faster: A clear advantage of utilizing another loan to pay all that you owe is it clears you of your liabilities quicker. This is most helpful for credit card balances that continue to incur interest rate charges with no end in sight. Using a debt consolidation loan would allow you to set an exact timeframe for when you'll achieve full payment. In this way, you'll bust yourself out of the high-interest rates associated with your credit card before things spiral out of control.
Lowers your credit score temporarily: Any time you apply for a new loan or line of credit, your credit score gets dragged down by a few points. The reason why is that lenders look at a new application as a new risk. This is no different with a debt consolidation loan, as your credit will inevitably take a hit. But, as mentioned, you just have to ensure that the new loan you acquired will be paid in full within the duration allotted for it, and your credit score will soon be back at healthy levels.Lowers your credit score temporarily: Any time you apply for a new loan or line of credit, your credit score gets dragged down by a few points. The reason why is that lenders look at a new application as a new risk. This is no different with a debt consolidation loan, as your credit will inevitably take a hit. But, as mentioned, you just have to ensure that the new loan you acquired will be paid in full within the duration allotted for it, and your credit score will soon be back at healthy levels.
Simplify your finances: Another benefit of consolidating debt is that you make your finances easier to manage. Monthly bills can be a headache to deal with, mainly because of the varying amounts and due dates. But when you merge everything into one bill, it's much easier for you to accomplish the necessary payment without ever missing a single due date.
Extends your debt repayment schedule: Finally, a critical downside to this loan type is that it prolongs your repayment schedule. The tradeoff of getting lower rates and lower monthly payments is your repayment terms get extended for a slightly longer period.
Improves your credit score: Debt consolidation can also help you improve your credit score because it allows you to lower your credit utilization ratio (CUR), a metric that lenders use to assess how much credit you're using from what is available to you. A low CUR implies less dependency on the use of credit, which is positive for your score. Besides that, when you establish a history of consistent payments toward your loan, your credit score will also get a boost in the long term.
The rates on debt consolidation loans vary by lender. But other than that, what dictates the rates you’ll ultimately get is a combination of several factors that all boils down to the lender’s risk.
For instance, since most debt consolidation loans are unsecured they will tend to have higher rates compared to loans that require collateral. In turn, lenders attach higher rates so as to compensate for the risk they’re taking.
Another factor is the common profile of the borrowers who seek this loan type. Usually, those who need to consolidate debt had, in some way, mismanaged their use of credit. Therefore, with this in mind, lenders make the necessary adjustment to the loan’s rate.
Finally, lenders look at each borrower’s application (e.g., credit score and credit history are considered). This helps lenders in deciding, on an individual level, how creditworthy a borrower is. If you’re opting for a joint loan for debt consolidation, both you and your co-applicant’s credit profile will be factored in the calculation of your loan’s interest rate.
Rates, as we mentioned, will be different for each lender. And the better credit you have, the better loan rates you’ll be able to get. If you’ve browsed rates online, you’ll find that the lenders that offer the lowest rates are often online lenders.
For instance, online lender LightStream currently has the best annual percentage rate (APR) for a debt consolidation loan in the market. For lenders with excellent credit scores, LightStream can offer an annual percentage rate of 2.49% and a maximum amount of $100,000. Another lender that can offer the same loan amount but with a slightly higher APR at 5.99% is another online lender, SoFi.
However, if your credit score is below 640, you may still find a lender that can offer attractive rates. One example is Best Egg. Best Egg can let you borrow up to $50,000, and the lowest APR they can give is the same with SoFi at 5.99%
Here’s a friendly reminder about debt consolidation loans with low rates: Rates can change. Not all the rates offered to you remain constant throughout the loan’s tenor. Some loan rates are subject to change because some are merely promotional in that it’s reduced temporarily to take advantage of certain seasonal demands.
Such an example is the holiday season when borrowers sometimes go on a crazy shopping binge and later realize that they have run up their credit card bills. A debt consolidation loan in this case comes in as an attractive solution.
So, the idea here is to make sure that what the lender’s rate is not just a special offer so that you avoid the risk of paying more interest charges over time.
That depends on your credit profile and the lender. Some lenders can offer you up to $100,000 if you have an excellent credit score.
Even if you didn’t use a personal loan for debt consolidation and opted instead to remortgage your house or borrowed from a relative, what you have to do remains the same. You still have to pay off all your card’s outstanding balance to cut it from milking you of any more interest payments.
It’s a last resort because if you use debt relief, your credit score is going to take a huge blow, and you may find it extremely difficult to obtain credit in the future.
It’s always best to pay your debts as soon as possible, especially if it charges high-interest rates like credit cards. A debt consolidation loan helps this situation because you eliminate those credit types that are simply bleeding you dry.
It sometimes is when you’re seeking approval. Two applicants improve the chances of getting your loan application approved.