Personal Loans for Debt Consolidation
When you’re drowning from multiple debt payments with different due dates and interest rates, it may be a smart move to combine everything in one loan, paying only a single bill each month through a personal loan for debt consolidation. Still, before you apply for one, you must first be educated about how this loan type works and its advantages and disadvantages, and that is what this article provides.
But before you dive into the rest of the contents, here are some of the top lenders that offer this loan:
- Rates
- Term
- Max Amount
PENFED
- 6.49 to 17.99%
- 1 to 5 years
- $20,000
LendingPoint
- 15.49% to 34.99%
- 2 to 5 years
- $25,000
Payoff
- 5.99%
- 2 to 5 years
- $35,000
- Rates
- Term
- Max Amount
LendingClub
- 10.68% to 35.89%
- 3 to 5 years
- $40,000
Avant
- 27.95% to 35.99%
- 2 to 5 years
- $35,000
Prosper
- 7.95% to 35.89%
- 3 to 5 years
- $40,000
- 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?
Debt consolidation loans work by rolling all your debts, including credit card bills, auto loans, medical bills, and maybe other high-interest loans, into a new loan with a lower monthly payment and interest rate.
This type of loan is offered by a bank or credit union. When your application gets approved, and you receive the amount you borrowed, you would need to use the funds to directly pay off all your existing debt from your other creditors.
However, it doesn’t rid you of all your bills. As you can see, you only converted them into new credit and simply made everything more manageable for you financially.
Since you could lower monthly payments, you’d be able to free up some of your income and allocate it to other necessities. And with a lower interest rate, you’ll also be able to save money in the long run from interest payments.
Requirements to Qualify
Lenders would need a few requirements from you to proceed with your application. They would need identification proof to verify that you are actually applying for the loan and not somebody else. They also need your income proof to review your financial status and if you have enough money to pay down your debt.
Of course, it would be best if you also have a good credit score not just to qualify but also to secure favorable loan rates and terms. Usually, credit scores above 750 would get you the lowest rates and the highest amount. Nonetheless, some lenders can offer debt consolidation loans with manageable rates and terms for those with less than a 640 score.
For ID proof, you can supply them with a copy of your passport, driver's license, or tax ID.
When Getting a Debt Consolidation Makes Sense?
Even though consolidating all your debt is an attractive solution, not every situation warrants its utilization. There are certain instances when going for this loan type makes optimum sense, and we highlighted some of them below:
When you can get a lower rate overall
Naturally, obtaining a debt consolidation loan only makes sense if you can secure a significantly lower rate. Imagine having several credit cards with interest rates ranging from 17% to 22%. If you can get a personal loan with an interest rate of around 7% or 8% to pay the balance on all your cards, then consolidating your debt is a good option.
When you plan on trimming down credit use
Debt consolidation is usually one of the last recourse of those who are deep in debt. So, if there is no end in sight in terms of credit use, debt consolidation offers merely a stopgap. In other words, you can get stuck in a vicious cycle if you don’t plan on refraining from using credit. Therefore, you must ensure that you don’t acquire any more financial burden when you employ this loan type.
When you can afford the monthly payment
A lot of times, a personal loan to cover all your bills may still offer you a high monthly payment, which could hinder you from pursuing that option. This could be due to the variety of credit you’re using. For instance, if a large part of your existing debt is an auto loan, your average monthly is perhaps already in the lower scale. So, unless you have excellent credit, it might be difficult to get a comparatively lower rate. Needless to say, a debt consolidation loan usually holds water in a situation where the monthly payment doesn’t exceed what you currently pay.
Pros and Cons
Here are the top pros and cons of personal loans to consolidate debt that you should consider in deciding whether you should obtain it or not:
| Pros | Cons |
|---|---|
|
Lower monthly payments:
As mentioned, taking out a loan to pay all that you owe is one way to reduce your monthly payments so you can free up some of your income and lessen your financial load. |
It extends your debt: In certainly most cases, this loan type will allow you to pay a lower rate and a lower monthly for all your debt. However, this is afforded to you by extending your repayment schedule. This means that it will take a few more months or possibly a few more years until you're actually fully paid. |
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Pay everything faster: Combining multiple debts into one loan is a way to pay everything faster, especially with credit card balances. An unpaid credit card balance will continue to pile up interest charges and could balloon to excessive amounts. This is concerning because lenders don't care when you accomplish full payment, but they will keep on charging you interest rates as long as there is balance left unpaid. A debt consolidation loan helps in ridding you of your credit card dues quicker and the high-interest rates associated with it. |
Your debt is not forgiven: Another thing to keep in mind is that your debt is still there despite being cleared with your other creditors. The amount you have to pay with the debt consolidation loan is still the original amount you owe. |
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Improve your credit score: Of course, when you manage to pay your loans and credit cards through a personal loan for debt consolidation, your credit utilization ratio will decrease. And if you don't know yet, a low credit utilization ratio has a lot to do with improving your credit score. |
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Average Debt Consolidation Loan Rates?
A debt consolidation loan is also a personal loan and typically the unsecured kind, which means that it doesn’t need the guarantee of collateral. Unsecured personal loans can reach a loan amount of up to $100,000 for those with stellar credit.
But usually, when you’re trying to amend a problematic debt situation with lenders wholly aware of it, the amount you can borrow may not be as high. On average, you can borrow about $35,000 even if your credit score is above 750.
Still, there are some exceptions, like with SoFi and LightStream, whose maximum loan amounts for debt consolidation are pegged at $100,000 for those with excellent scores.
Debt Consolidation vs Balance Transfer Card
Now, what if you don’t need a significant amount? For instance, you just want to address your mounting credit card bill before it gets out of hand. In that case, a balance transfer might be more practical.
A balance transfer is another form of debt consolidation, except that it doesn’t involve a personal loan. It works by transferring the existing balance of your credit cards into a new one that charges a 0% APR over a certain period, usually up to 18 months.
This will be a lot more convenient because it will cost you nothing to settle everything. Some balance transfer credit cards also have rewards and other perks — sometimes there’s even no annual fee.
A debt consolidation loan only tops a balance transfer card if the loan amount is higher and you'd want a fixed rate over a more extended period.
Alternatives to Personal Loans for Debt Consolidation
Now, what if, for some reason, your application for a loan for debt consolidation is denied? What can you do? If you’re up to your ears in debt, you can always seek debt relief from your lawyer or a third-party company. Debt relief allows you to settle what you owe for a lesser amount.
You can also file for bankruptcy, which would now take your loan settlement to the federal court. Doing so can extend your repayment term or allow your debt to be forgiven. However, if you use either one of the two options as your last resort, your credit score will suffer immensely, costing you the chances of ever borrowing money again.
Frequently Asked Questions (FAQ)
It may be a smart move to consolidate debt if the new credit offers a lower interest rate and the estimated monthly payments are lower than what you’re currently paying.
Yes, it is possible to do so, but it would be much easier if you have one because your account is where lenders deposit the money you borrowed. Also, without a bank account, your options may be limited to high-fee lenders.
That depends on what your debt sources are. If most of them are credit card debts, you can always opt for a balance transfer card to not have to pay interest for at least a year.
Yes, you can, and this is because some lenders have low credit score criteria. In fact, some lenders use metrics other than a credit score to analyze creditworthiness.
Usually, lenders require a credit score of at least above 640, but some lenders can approve an application even if the credit score is less than 600.
