Debt Consolidation Loans: What You Need to Know
What is a debt consolidation loan?
A debt consolidation loan is a personal loan you use to pay off multiple debts, such as balances on high-interest credit rating cards, medical bills or other unbarred debt. This scheme can lower the total matter to you owe on the debt and help you pay it off faster. It can besides make debt easier to manage, since you only need to keep track of one requital.
Our guide to debt consolidation loans can help you understand how they work, when they ’ re a dear mind and how to get one. Why trust NerdWallet ? NerdWallet has rated and reviewed personal loans from more than 35 fiscal institutions. We collect over 45 data points from each lender, consultation company representatives and compare the lenders with each early. We do not receive recompense for our ratings. Read more about our personal loanword star ratings methodology and our editorial guidelines.
How do debt consolidation loans work?
Online lenders, banks and credit unions offer debt consolidation loans. If you qualify, the lender deposits the loanword into your bank account, and you use that money to pay off your debts. Some lenders send loan proceeds directly to your creditors, saving you that step. once you pay off your early debts, you make monthly payments toward the debt consolidation lend. Payments are fixed for the life sentence of the loanword, typically two to seven years.
Are debt consolidation loans a good idea?
If you can qualify for a abject adequate pastime rate, and you can afford the monthly payments, debt consolidation loans can be a smart scheme for getting out of debt. here are the advantages of debt consolidation loans .
- You pay less in interest. A debt consolidation loanword should have a lower matter to rate than the compound rate on your existing debts. This means you ’ ll owe less matter to on the amount you ’ rhenium borrow .
- You can get out of debt fast. Depending on the measure you owe and the refund terminus you choose, you may get out of debt fast with a consolidation loan .
- You can budget for fixed payments. Unlike other debts such as credit cards, debt consolidation loans have fixed rates and monthly payments that won ’ metric ton change over the course of the lend, making budgeting easier .
- You ’ ll have a clear polish line. By consolidating multiple debts under one lend, you ’ ll have an exact date when you ’ ll be debt-free, which can be motivating and help you stick to the payments .
Debt consolidation is one of respective strategies for paying off debt. It won ’ thyroxine exploit if you have excessively much debt – think 50 % or more of your gross income – or underlie spend issues.
Rates on debt consolidation loans
Debt consolidation loans work well if the lend has a lower concern rate than the unite concern on your existing debts. Rates vary by lender and depend heavily on your credit history and ability to repay . Nerdy lean : If you don ’ metric ton know your citation score, you can check it for rid on NerdWallet. Though borrowers with good and excellent accredit ( 690 FICO or higher ) are more likely to qualify for the lowest rates, you can still get a debt consolidation lend with bad credit . hera is what concern rates on personal loans look like, on average .
|How ‘s your credit ?||score compass||Estimated APR|
|excellent||720-850 .||10.5 % .|
|good||690-719 .||15.5 % .|
|fair||630-689 .||20.8 % .|
|bad||300-629 .||26.1 % .|
informant : average rates are based on aggregate, anonymized offer data from users who pre-qualified in NerdWallet ’ s lender market from Oct. 27, 2021, to April 27, 2022. Rates are estimates lone and not specific to any lender. The lowest credit scores — normally below 500 FICO — are improbable to qualify. information in this mesa applies only to lenders with APRs below 36 %.
Comparing debt consolidation loans
Like any major fiscal decision, it ’ sulfur important to compare your options to make the best option possible. Take into report these factors. april : The annual share rate, or APR, summarizes the full monetary value of the loan and includes interest and any fees. Comparing APR between loans is one of the best ways to gauge costs. The lower the APR, the less expensive the loan.
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refund terms : Some lenders offer multiple repayment terms to choose from, while others only offer two choices ( for exercise, a three- or five-year term ). Having more repayment term options means you can better customize the lend. For exemplar, a longer term means a lower monthly payment, while a shorter term carries less interest. special perks : Some lenders focus specifically on debt consolidation and offer particular features, like sending the loanword funds directly to your creditors, offering a pace dismiss for consolidating or monitoring your credit score while you pay off debt. NerdWallet has reviewed more than 35 lenders to help you choose one that ’ s correct for you. Below is a tilt of lenders that we believe offer the best debt consolidation loans.
How to get a debt consolidation loan
1. Add up current debts and calculate the combined interest rate
The beginning dance step in getting a debt consolidation loan is having a clear picture of your current debt. You can use NerdWallet ’ s debt consolidation calculator to see your total balance, full monthly payment and combined interest rate across all debts. You ’ ll want to keep two numbers in take care moving fore : Your entire debt, since this is the loan amount you need to apply for, and your combined interest rate, since you ’ ll want a lower matter to rate on your consolidation lend.
2. Pre-qualify and compare loan options
One of the best ways to compare lend offers is to pre-qualify with multiple lenders, which lets you see your potential loan terms, including APR, without any effect on your accredit score. Though not all banks or accredit unions offer pre-qualification, most on-line lenders do.
3. Apply for a debt consolidation loan
once you ’ ve decided on a lender, it ’ randomness time to apply for the lend. Most loanword applications are on-line and ask you to supply personal information like your Social Security numeral, address and early contact details. You besides may be asked to provide proof of identity, employment and income. once you ’ ve submitted your application, the lender will make an blessing decision. If you ’ ra approved, you ’ ll sign the loan agreement and receive the funds. Funding prison term varies between lenders, but some lenders can fund the like day you ’ ra approved.
4. Pay off creditors
here ’ s the most significant tone : Use the loanword proceeds to pay off your existing debts. Some lenders send the funds to your creditors for you, so you ’ ll need to provide score data about your existing debts — and check the accounts to make surely they ’ re paid off. If a lender doesn ’ t offer direct payment, they ’ ll lodge the funds in an explanation of your choose or mail a check, if you prefer. It ’ ll be up to you to make sure the right come goes to each debt.
5. Begin making payments on your new loan
once your existing debts are paid, you ’ re left with your newfangled lend. personal loanword payments are monthly, though there ’ sulfur normally no fee for paying off a lend early. Make a design now to manage your personal lend payments. As you make advancement on paying off your lend, try to keep your credit wag balances at or near zero until you ’ re debt-free. But avoid closing the accounts, which can lower your credit sexual conquest.
How will debt consolidation affect my credit score?
When you apply for the loan, lenders conduct a hard credit inquiry, which temporarily lowers your score by a few points. Like other forms of credit, making your loanword ’ s monthly payment on fourth dimension and in broad aid build credit, while missing payments could damage it. If you took out the lend to pay off credit card debt, but end up carrying a poise on your cards while the loanword is still active, your credit grudge could besides suffer since your overall debt has increased. But arsenic long as you are able to pay off your loanword and stay out of debt, consolidation should have a positive overall effect on your recognition.
Alternatives to debt consolidation loans
If you ’ rhenium not approved for a personal loanword, there are other options for paying off debt. Balance transfer poster : Borrowers with good or excellent citation can transfer credit poster debt to a balance wheel transmit credit card, then pay it off during the promotional 0 % APR time period, which can last up to 21 months. Most cards charge symmetry transfer fees, which typically range from 3 % to 5 % of the come being transferred. recognition rede : If you don ’ t have good credit, consider nonprofit recognition guidance. These agencies can help set up a debt management plan, which consolidates your credit card debts into one monthly requital at a lower interest rate. dim-witted debt payoff strategies : not all debt payoff requires consolidation. You can besides use simpler payoff strategies, like the snowball or avalanche methods, to figure out which debt to tackle first, then second and sol on until all debts are paid. Less popular – and riskier – options for dealing with debt include a home equity loan, a 401K loan or, in cases of extreme debt, filing for bankruptcy.
FAQs about debt consolidation loans
Does debt consolidation save money?
Consolidating debt can save money on interest. Plug your existing balances and interest rates into a debt consolidation calculator to see how much you can save with a debt consolidation lend.
What are the risks of a debt consolidation loan?
The risks of debt consolidation include getting a lend that ’ south more expensive than your current debt or not addressing the root causal agent of your spending, so you end up in even more debt than ahead.
How do you qualify for a debt consolidation loan?
Lenders look at accredit score, income and debt to qualify you for a debt consolidation lend. A 600 FICO score and a debt-to-income proportion of 40 % or lower are distinctive minimum requirements. Some lenders specifically offer debt consolidation loans for bad credit.
Will a debt consolidation loan hurt my credit score?
Applying for a debt consolidation lend requires a heavily inquiry, which can temporarily knock a few points off your credit score. But if you use the lend to pay off debt, then pay off the loanword successfully, the overall effect on your credit should be positive.
NerdWallet’s personal loan rating methodology
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NerdWallet writers and editors conduct a entire fact arrest of our personal loan ratings and reviews per annum, but besides make updates throughout the year as necessity. Our ace ratings award points to lenders that offer consumer-friendly features, including soft credit checks to pre-qualify, competitive sake rates and no fees, foil of rates and terms, flexible payment options, fast funding times, accessible customer service, report of payments to credit chest of drawers, and fiscal department of education. We besides consider regulative actions filed by agencies like the Consumer Financial Protection Bureau. We weigh these factors based on our assessment of which are the most important to consumers and how meaningfully they impact consumers ’ experiences. This methodology applies only to lenders that cap interest rates at 36 %, the utmost rate most fiscal experts and consumer advocates agree is the satisfactory limit for a loanword to be low-cost .