If you’re ready to take care of your money, debt consolidation can be a great method to simplify payments and potentially lower your interest rates. It may also lower your monthly debt payments. This is because, in contrast to credit cards, medical loans, and other types of debt, personal loans frequently have lower interest rates—especially if you have high to exceptional credit. Many lenders also offer direct payments to third-party creditors, so you won’t have to bother about the details of debt consolidation. Let’s see how a debt consolidation loan can help out when you have bad credit.
What is Debt Consolidation?
Debt consolidation is the process of combining various debts, usually from credit cards, into a single payment. This can help you pay off debt faster and keep track of how much debt you have.
What is the procedure for obtaining a Debt Consolidation Loan?
You apply for a debt consolidation loan to borrow the amount owed on your existing debts. You receive the cash after being authorised for the loan and use it to pay off your credit cards or other loans. In some situations, the payments might be sent straight to your creditors. Then you start making monthly payments on your new debt consolidation loan.
Credit card debt is the most common sort of debt to consolidate because it often has some of the highest interest rates. Other sorts of debt, such as personal loans, payday loans, and medical bills, can also be combined, although student debt cannot be consolidated in the same manner that other categories of debt can.
What is the Cost of a Debt Consolidation Loan?
Debt consolidation loans are intended to assist you in managing your existing debt, thus, the loan must cover the value of your existing debts. Numerous variables affect the cost of a debt consolidation loan, such as:
The value of the debts you choose to consolidate will determine the loan amount.
- Duration: The length of time you wish to borrow (the typical term is four years*).
- APR: The loan interest rate plus any other fees, such as annual fees or arrangement fees.
- Any additional fees: If you pay off the loan early, the provider may charge a settlement fee.
Check to see if the cost of the consolidation loan is worthwhile in comparison to what you’re spending on your previous debts.
Can I get a Debt Consolidation Loan even though I have Bad Credit?
If you’ve previously struggled with debt and have a low credit score, you might not be offered the best loan rates. However, there are specialised lenders who offer debt consolidation loans for people with bad credit. After reviewing your credit score, your lender will determine which form of loan and what interest rate it may offer.
If you have bad credit, providers may give you a secured debt consolidation loan rather than an unsecured debt consolidation loan. But bear in mind that, while this may appear to be a fantastic alternative, your house is at risk if you can’t keep up with your repayments.
The good news is that if you make your debt consolidation loan payments on schedule and have no other negative credit indicators, your credit score should increase over time.
How to Use a Personal Loan to Consolidate Debt
#1. Examine your credit score.
The majority of consolidation solutions will necessitate a credit check. Because unsecured personal loans do not require collateral, lenders rely more largely on your credit score, as well as other variables, to assess your eligibility. My LendingTree allows you to check your credit score for free.
#2. Determine how much money you’ll need to borrow.
Add up all of the monthly debt payments you want to consolidate. A personal loan can be used to pay off credit cards, payday loans, and other high-interest obligations.
#3. Determine the APR required to save money.
For a personal loan to be worthwhile, your APR must be lower than what you are presently paying on your debts.
#4. Prequalify with lenders to compare APRs.
Many lenders allow you to prequalify for a personal loan in order to estimate your possible APR without affecting your credit score. This allows you to compare projected loan offers before submitting a formal application.
#5. Make a formal application to a lender.
If you are authorised, the lender can directly transfer the funds into your bank account. That money can be used to pay off any form of debt.
Comparison of Personal Loans for Debt Consolidation
Personal loans are frequently offered online through traditional banks, credit unions, and alternative lending platforms, allowing you to apply quickly and conveniently without visiting a bank branch. Many of these lenders also provide reasonable interest rates and flexible repayment options, which means you might save money by consolidating your existing loans.
| LENDER | EST. APR | LOAN TERM | LOAN AMOUNT | BEST FOR | MIN. CREDIT SCORE |
| Best Egg | 5.99%–35.99% | 3–5 years | $2,000–$50,000 | High-income earners with good credit | 640 |
| Payoff | 5.99%–24.99% | 2–5 years | $5,000–$40,000 | Consolidating credit card debt | 600 |
| LightStream | 4.98%–19.99% (with autopay) | 2–7 years | $5,000–$100,000 | High-dollar loans and longer repayment terms | Not specified |
| PenFed | Starting at 4.99% | 1–5 years | $600–$50,000 | Smaller loans with a credit union | Not specified |
| OneMain Financial | 18%–35.99% | 2–5 years | $1,500–$20,000 | Fair to poor credit | Not specified |
| Discover | 5.99%–24.99% | 3–7 years | $2,500–$35,000 | Good credit and next-day funding | 660 |
| Upstart | 3.50%–35.99% | 3 years or 5 years | $1,000–$50,000 | Consumers with little credit history | Not Specified |
| Marcus by Goldman Sachs | 6.99%–19.99% (with autopay) | 3–6 years | $3,500–$40,000 | Consolidating large debts | 660 |
Why should you consolidate your debt?
Debt consolidation may have several benefits, including:
#1. Lower interest rates:
If you have numerous credit cards with high-interest rates and qualify for a debt consolidation personal loan with a lower interest rate, you may save a lot of money in interest and fees.
#2. Debt payout faster:
Combining all debt into one bucket can make it easier to pay off debt faster because you don’t have to balance different payments.
#3. Simplified finances:
Because credit card interest rates vary, your monthly payments will vary based on your balance, and it can be difficult to predict when your debts will be paid off. Debt consolidation consolidates all of your debts into one place, making it easier to keep track of them.
#4. Specified repayment schedule:
A debt consolidation loan combines various obligations into a single monthly payment with a fixed interest rate and a set repayment term, ensuring that your monthly payments remain consistent. You don’t have to be concerned about several due dates or different payment amounts.
#5. Credit score enhancement:
Credit scoring models such as FICO and VantageScore place a high value on your credit utilisation ratio. As a result of lowering your credit usage ratio with a new consolidation loan, your credit score may improve.
In general, a debt consolidation loan is an excellent idea if you can pay off the new debt, have a high enough credit score to qualify for low-interest rates, and want the steadiness of a regular monthly payment.
Although debt consolidation can be beneficial to many people, it cannot address all of your financial issues on its own. You must avoid making late payments or carrying balances on previously paid-off credit card accounts. Otherwise, you risk putting your credit in jeopardy. It’s also not a good idea if you’re offered higher interest rates as part of the consolidation process; otherwise, you’ll end up paying more on your debt altogether.
Debt Consolidation Loan Alternatives
Debt consolidation loans can be beneficial, but they are not appropriate for everyone. If you’re seeking alternatives to debt consolidation loans, here are a few more possibilities to explore.
#1. Home Equity
One frequent method of debt repayment is to use the equity in one’s property. Borrowers can use their homes as security for home equity loans and home equity lines of credit (HELOCs). If you’re thinking about going this route, be sure you evaluate the hazards. If you are unable to make your payments, your home may be seized by the lender.
Borrowers who have built up equity in their homes are the ideal candidates for this.
Home equity loan vs. debt consolidation loan:
Home equity loans and HELOCs may have lower interest rates than debt consolidation loans, but they carry additional risks because your home is used as collateral.
#2. Debt relief services
Debt relief services, also known as debt settlement firms, provide an alternative approach to dealing with your debt if you do not qualify for a consolidation loan. These firms contact creditors and debt collectors on your behalf and attempt to settle the debt for a lower sum. If you decide to use debt relief services (possibly as an alternative to filing for bankruptcy), be aware that the costs charged by these companies might be exorbitant. Before applying, thoroughly investigate the fees, reviews, and other details. It’s also a good idea to evaluate multiple debt relief organisations before making a decision.
This is best for Borrowers who are having financial difficulties and are unable to pay their debt.
Debt relief services vs. debt consolidation loan:
Unlike debt consolidation loans, debt relief services seek to erase some of your debt without requiring you to pay it back. Having said that, getting debt relief is a dangerous activity that can harm your credit score.
#3. Credit counselling
This is another option that might help you get your debt under control. Credit counselling firms are frequently (but not always) non-profit organisations. In addition to debt counselling, these businesses may provide a debt management plan or DMP.
A DMP requires you to make a single payment to a credit counselling business, which then distributes that payment to your creditors. The organisation negotiates lower interest rates and costs on your behalf in order to reduce your monthly debt obligation and help you pay off your debts faster.
DMPs are rarely free, especially when provided by a non-profit credit counselling firm. You may be required to pay a $30 to $50 setup charge, as well as a monthly cost (typically $20 to $75) to the credit counselling business for maintaining your DMP during a three- to five-year period.
Who this is best suited for: Borrowers who require assistance in organising their debt payments.
Credit counselling vs. debt consolidation loan:
With a debt consolidation loan, you have complete control over your repayment schedule, and you may typically apply with minimal expenses. Credit counselling involves a third company managing your payments while charging you a startup fee.
#4. Balance transfer credit card
A balance transfer card allows you to transfer your credit card debt to a new credit card with a 0% intro rate. The purpose of a debt transfer credit card is to pay off the bill before the introductory rate expires in order to save money on interest. Make sure to account for balance transfer fees when calculating possible savings.
Remember that paying off existing credit card debt with a balance transfer to another credit card is unlikely to lower your credit usage ratio in the same way that a debt consolidation loan would.
A debt consolidation loan will also provide bigger borrowing limits, allowing you to pay off more debt, as well as fixed monthly payments, making it easier to budget and stay disciplined with debt repayment.
Who this is best for Borrowers who can swiftly pay off previous debt.
Balance transfer credit card vs. debt consolidation loan:
Balance transfer cards are frequently the best option for borrowers who can pay off their debt within 18 months, which is the normal 0% APR period. A debt consolidation loan is a better option if you need more time to pay off your debt or if you have a lot of debt.
Debt Consolidation Loan FAQs
Does debt consolidation affect your credit score?
Debt consolidation, which involves consolidating numerous debt balances into a single new loan, is likely to enhance your credit ratings in the long run if used to pay off debt. That’s fine as long as you make your payments on time and don’t accumulate further debt.]
What is the minimum credit score for a debt consolidation loan?
Typically, you’ll need a credit score of roughly 650, though bad-credit debt consolidation lenders exist and may accept credit scores as low as 600. Just keep in mind that the lower your credit score, the higher your interest rate will be.
How long does debt consolidation stay on your record?
The fact that you settled a debt rather than paying it off in full will appear on your credit report for as long as the individual accounts are reported, which is normally seven years from the date the account was resolved.
