Debt consolidation loans allow borrowers to roll multiple debts into a single new one with fixed monthly payments and, ideally, a lower interest rate. With a debt consolidation loan, a lender issues a single personal loan that you use to pay off other debts, such as balances on high-interest credit cards. You’ll pay fixed, monthly installments to the lender for a set time period, typically two to five years. The rates may be a bit higher and still make sense if your multiple loans cost is very high, and your credit score is poor.
Best personal loans for debt consolidation loans for good credit come with APRs of between 4.99% and 10%. For bad credit, you can expect and APR of up to 35.99%. If you are with bad credit we invite you to read our guide on best debt consolidation loans for bad credit:
Some of the things you should pay attention to when looking for this type of loan include;
- Credit score requirement.
- Fees and penalties.
- Repayment period.
- Debt to income ratio.
- Lending limit.
Here are Elite Personal Finance top picks.
LendingTree is the best place to start shopping for personal loans for debt consolidation. This platform does not extend loans but connects borrowers with the best deals in the market.
Once you make an application on their platform, you are matched with up to five different lenders that will compete to give you the best rates.
- Easy online application.
- Multiple offers.
- Low APRs.
- Quick funding.
- Requires a great deal of personal information to get meaningful results.
Best for: Borrowers with a steady source of income.
Upstart is another great option for personal loans with APRs ranging from 8.89% to 35.99%. The loanable amount is between $1000 and $50000. One of the best things about Upstart is that they do not rely on FICO score as the only determinant of loan qualification.
You may qualify for a personal loan with a poor credit score if you meet other criteria such as education, career, job history, and SAT scores.
- Considerable APRs.
- Unique loan approval process.
- Starts with a soft pull.
- Two repayment terms.
- Origination fees.
Best for: Low credit history
Payoff extends personal loans for debt consolidation to borrowers with a minimum credit score of 640. The typical APR ranges from 5.99% to 24.99%.
With this lender, you can repay within 24 to 60 months with options to defer, skip or change payment date. The loanable amount is between $5,000 and $35,000.
- Offers support and financial guidance to help less disciplined borrowers stay focused.
- Considerable rates for bad credit.
- Flexible payment options.
- Loan application requires a great deal of personal information.
- Charges origination fees.
- You have a fair credit score.
- You have a debt to income ratio of 50% or less.
- You have an annual income of not less than $40,000.
- You have a credit history of 2 years and above.
Why Personal Loan for Debt Consolidation?
The principal reasons personal loans are considered as the best option for debt consolidation is because they mostly come at a lower APR than credit cards.
Again, most are unsecured meaning that you do not have to risk your home or car to get financing.
However, a personal loan may be more expensive than your multiple debts when paid separately especially when your credit score is not good. But this is not to mean that people with bad credit should shun away from this form of debt management.
There are lenders out there who specialize on debt consolidation personal loans for borrowers with low credit. You will need to shop around to identify such offers.
Another advantage of personal loans is that it is much simpler to apply for them. With online lenders, all you need to do is to fill out a simple online form and wait for approval.
Most online lenders will respond within hours of application and disburse loans within two working days. You need not be worried about multiple online applications affecting your credit score since most of this lenders conduct soft inquiries when checking your credit report.
Applying for a personal loan for debt consolidation may help improve your credit score especially if all you have are credit card debts. This is because having a diverse debt portfolio is considered a good thing by credit rating agencies.
Again, by transferring debt from credit cards to a personal loan, you lower your credit utilization ratio hence improving your credit score.
Are Debt Consolidation Loans Good for You?
First things first, it is important to note that debt consolidation, in general, is not the best debt management strategy for everyone.
This method only works if you are financially prepared to take up the challenge. Moving all your debt into a personal loan does not mean that you are now debt free and can borrow more using the freed-up credit cards.
If you are not disciplined, you may find yourself accumulating more debt even before you settle the personal loan.
You also need to be careful with the loan terms and monthly amounts. Some loans will have lower monthly payments than your multiple loans but a more extended repayment period and hence higher overall costs. Others will have high monthly payments but a lower repayment period.
Determine the monthly amount you can afford to pay comfortably and look for offers that can accommodate that within a reasonable repayment period.
APRs, fees, and penalties – Determining the right choice.
Personal loans APRs range from 4.99% to 35.99%. As previously mentioned, unsecured loans are usually cheaper than credit cards.
Creditcard.com estimates that as of January 2018, the national average APR on a credit card is 16.38%. The National Credit Union Association approximates the average APR for a 3-year unsecured personal loan as of March 2018 to be 9.22% for credit unions and 10.99% for banks.
Online lenders are likely to be even much cheaper with some offering rates as low as 4.99%. APRs are usually inclusive of fees but not penalties. If you are looking to pay off your debt aggressively, take loans with shorter terms and no prepayment penalties. This will enable you to direct all your budget surpluses to the loan repayment hence clearing the debt off faster.
Loan rates depend on your credit score and also repayment period. A borrower with a good to excellent credit score is likely to secure a personal loan with lower APRs. Likewise, a short-term personal loan has lower APRs than long-term loans, but they will have high monthly payments.
We cannot stress enough on the importance of picking personal loans whose monthly payments you can manage comfortably. Evaluate your finances and set a budget with an allowance to ensure that you can make payments even when unexpected expenses crop up.
The Dos and Don’ts of Personal Loans for Debt Consolidation
The goals of taking a personal loan for debt consolidation are to save on interest payments and also pay off your debt aggressively. These tips will help you achieve these goals smoothly.
- Shop around for a reasonable rate.
If you want to see a full list of offers, shop around.
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Most borrowers make the mistake of shopping out of desperation and therefore not taking time to evaluate as many deals as possible.
When shopping for a personal loan for debt consolidation, at least have some idea of what a good deal should be. If your credit score is excellent, we recommend that you look for a loan with an APR that is half or less of what you pay for the multiple loans.
Take advantage of the many online tools out there to help you calculate the savings on various deals. Read the fine print of each lender carefully to identify fees and penalties and make inquiries where details are not clear.
Browse through our website to identify the best offers and feel free to consult from our team of experts.
- Come up with a payment plan.
Successful debt payment requires psychological preparedness as it does financial readiness.
Your payment plan should be clear and well-thought-out. Make a manageable monthly payment budget with an allowance to cover for unexpected costs.
Remember that to be able to clear your debts successfully you must be ready to make sacrifices. However, you need to be careful not to strain yourself too much since this may demotivate you along the way.
- Keep your credit cards open.
Once you have moved all your credit card debts into a personal loan, you may decide to close them to avoid the temptation of taking up more debt.
However, it is important that you keep them open since they have a role to play in building your credit score. Your credit rating also takes into account the amount of debt you can potentially use versus what you have used.
The higher the potential balance, the less risky you are considered and the higher the credit score. However, this only applies to cards that have been used.
- Do not consolidate your loans with a secured personal loan.
Secured personal loans are not very common, but they are an option with some lenders. You may get such offers especially if your credit score is not sufficient.
We recommend that you keep away from such deals since they are likely to get you into more trouble if you fail to meet the monthly payments.
Secured personal loans are usually tied to an asset mostly your home in the form of a home equity line of credit or home equity loan. They are also primarily long-term ranging from 10 to 15 years. This means that the overall cost of debt is higher than other options.
As mentioned earlier, unsecured personal loans for bad credit are available with some lenders.
- Consult a credit counseling agency.
If you are not sure whether a personal loan for debt consolidation is the best option for you, we recommend that you seek credit counseling services.
Most credit counselors will not charge you anything for the first session so there is no reason as to why you should not try it.
Nonprofit credit counseling agencies are the best option since they are the most likely to give you an objective opinion. This is because they are usually sponsored by the government and are therefore not influenced by “for profit” companies to sell their debt management products.
Tips for Getting Approved for a Personal Loan for Debt Consolidation Companies
Whether your credit score is good or bad, there are some things you need to do to increase the chances of getting a personal loan for debt consolidation.
- Check the minimum requirements for each loan.
Before you apply for a debt consolidation personal loan, ensure that you have met all the minimum requirements.
Most personal loans lenders will have different specifications for credit score, debt to income ratio, employment history, and repayment history.
Remember that failing to meet the minimum requirements for one lender does not mean that you do not qualify for another. That’s why you should shop around patiently. You may be lucky to find amazing offers even with bad credit.
Before you apply, verify that your details are correct. A small mistake including a typing error can often lead to rejection.
Taking a personal loan for debt consolidation is a good idea if you have the right mindset, have the financial capacity, and can find good offers. Elite Personal Finance provides you with everything you need to identify the best deals in the market. Follow us on social media to be the first to know when great deals come up.