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A new credit card here, a personal loan there, maybe a line of credit — it’s easy to find yourself carrying a variety of balances over the years. These are often unsecured debts with high interest rates and different repayment terms.
Debt consolidation loans are one option to consider if you need help simplifying your debt. While they aren’t for everyone, these loans can allow you to lower interest rates, make it easier to pay off balances, and in some cases, reduce your monthly payment.
Keep reading for how to find the best debt consolidation loan for your financial situation.
What’s 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 one simple balance. If you have four credit cards that you’re paying off, for example, you can use a debt consolidation loan to pay off your credit card balances and then start making payments on the loan.
Alternatively, some lenders may pay off your creditors directly, so you’ll be asked to provide them with loan balances and account numbers.
As is the case with nearly 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 to see APRs starting as low as 5.99% and going as high as 35.99%.
With Credible, you can easily compare rates from various lenders at once.
How do debt consolidation loans work?
To take out a debt consolidation loan, you’ll need to submit an application and meet the lender’s borrowing requirements. Once you’ve applied and qualified, you’ll be offered your terms, including a loan amount and a fixed interest rate. Your lender will provide a schedule for your loan, including a monthly payment amount based on your chosen loan term.
In some cases, this new payment may be less than the combined amount you were paying on your existing debts. While a lower payment may help with cash flow, note that this may cost you more in interest over the life of the loan, and it could take you longer to get out of debt. If you agree to the loan terms, you’ll then sign closing documents for the funds and they’ll be disbursed.
Depending on the lender, there may also be loan closing costs and other fees to consider, such as an origination fee or early payoff penalty. These can affect the total cost of your loan, so do the math to ensure that even with these fees (when applicable), you’ll still save 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 through your existing bank or credit union. Since you have a relationship established there, it might be easier for you to get approved and funded, and managing your loan may also be simpler. Just make sure that the interest rates, fees, and terms are in line with what you are seeing elsewhere, so you don’t pay more for the sake of convenience.
You could also opt for a debt consolidation loan through a credit card issuer. Credible Partner Lenders like Avant, Best Egg, and Discover provide debt consolidation loans of up to $35,000 with a simple online application. 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 shop around for 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 lender’s requirements.
Comparison shop. First, you’ll want to comparison-shop to find the best rates and loan terms. Credible is a great place to start, since it lets you see multiple lenders and get details about their loan products in one place.
Prequalify. You can often prequalify with many lenders, especially if you go through a platform like Credible. Prequalifying allows you to compare rates and get an idea of your likelihood of approval, with just a soft credit check and no commitment.
Apply. Once you’ve picked a lender and prequalified, it’s time to apply. You’ll need to provide personal information, such as your Social Security number, address, date of birth, email, and income. The lender will usually conduct a hard credit check at this time, and you’ll be given a final decision.
Close. Now, it’s time to close on your new loan. Your lender will send over closing documents that outline your loan amount, interest rate, repayment terms, and any applicable fees. Once your loan documents are signed, your funds will be disbursed (either to you or directly to your creditors). Funding times will vary, but you may be able to receive your loan funds in as little as one 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 your debt repayment, usually by lowering your overall interest rates. How much you’ll save depends on your unique situation.
For example, say you have $10,000 in credit card debt at a current APR of 25%. If you only make the minimum payment of $309 each 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 ($6,808 of which is just interest).
With a debt consolidation loan, you could lower that APR to 5.9% and lower your monthly payments to just $193. While it might take you a few extra months to pay off the debt, you’ll pay just $1,572 in interest: a savings of $5,236!
Debt consolidation loans
Minimum monthly payment
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What factors should I consider in a debt consolidation loan?
Each debt consolidation loan is different, so you’ll want to consider and compare each of the factors involved to ensure that you’re picking the right loan for you.
Interest rate and APR: The interest rate and APR, or annual percentage rate, on your loan will dictate how much that loan costs you in the end. The lower the rate, the less you’ll pay. When consolidating debt, choose a loan that reduces your effective interest rate.
Closing costs and fees: Some lenders may charge origination fees, administration fees, and other closing costs, which will add to your total loan expense. You may need to factor these costs into your total borrowed amount to make sure your final disbursed funds are enough to cover your debts.
Loan term: Your loan term will determine how long you have to repay the debt and what your monthly payment amount will be. Balance your debt repayment goals with your monthly budget to find the right term for you.
Debt consolidation loan alternatives
Here are a couple of alternatives to debt consolidation loans to consider if you want to pay off your existing debt faster, or for less interest.
0% intro APR balance transfer credit card
The first option is to utilize a 0% balance transfer card. With a balance transfer credit card, you can shift your debt from one account to another, taking advantage of an introductory zero-interest opportunity. Just be sure to pay off the balance before the introductory period ends, or your remaining debt will begin accruing interest at the card’s regular rate.
Another option is to tap into your existing home equity 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 utilize the equity that’s already 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 a debt that’s secured by your home. If you were to default on the loan, you could lose your property.
Debt consolidation loans can be a key part of any debt management plan. If you’re juggling multiple debt balances, especially with 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 best for you.
About the author: Stephanie Colestock is a Washington, D.C.-based writer who has more than 10 years of experience in writing about investing, business, and personal finances. Her 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 earning her CFP® certification. When Stephanie isn’t writing about finances, you can find her either traveling, reading a good book, or exploring the outdoors with her husband and two young sons. You can find her on Twitter or on LinkedIn.