Top Debt Consolidation Loan for June 2023
Simplifying your life and saving money can be achieved through a debt consolidation loan. To find the best debt consolidation loan for your needs, it's important to consider various factors such as rates, fees, repayment terms, and customer service. At Bills.com, we have conducted extensive research on debt consolidation lenders and recommend exploring multiple options to find the loan that suits your situation.
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Key Points Covered in this Article
- Understanding Debt Consolidation Loans
- Interest Rates and APR for Debt Consolidation Loans
- Qualifying for a Debt Consolidation Loan
- Pros and Cons of Debt Consolidation Loans
- Alternatives to Debt Consolidation Loans
- Frequently Asked Questions
What is a Debt Consolidation Loan?
A debt consolidation loan is a loan taken out to pay off multiple debts. It is beneficial when you have various debts, such as car loans, credit cards, and medical bills, and want to streamline your payments. The idea behind a debt consolidation loan is to secure a fixed-rate loan with lower interest to repay your other debts, ultimately reducing your overall debt expense.
Here is a brief explanation of key terms related to debt consolidation loans:
Loan amount: Lenders offer a range of loan amounts, typically starting from a minimum of around $5,000 (with Upgrade offering loans as low as $1,000). The maximum loan amount varies, often reaching at least $35,000. Some lenders, like SoFi, even provide larger loan amounts, up to $100,000.
Term: The length of your debt consolidation loan is crucial as it determines your monthly payment. Most debt consolidation loans have a duration of 2-5 years, but some lenders, such as Lightstream, extend it to 7 years.
Interest rates and APR: When comparing debt consolidation loans, lenders present an Annual Percentage Rate (APR). The APR includes the base interest rate and all fees charged by the lender. It represents the annual rate you are charged for borrowing money, assuming the loan is not paid off early.
What interest rate can I get on a debt consolidation loan?
A debt consolidation loan allows you to consolidate your debts into a single monthly payment, offering potential savings through lower interest rates. Debt consolidation loans typically have fixed interest rates, and some lenders may charge administration fees upon loan disbursement. To compare rates accurately, focus on the APR, which considers the interest rate, fees, and term of the loan.
The average rate for a 24-month personal loan, according to the Federal Reserve, is approximately 9.5%. However, several factors heavily influence the interest rates for debt consolidation loans, including market conditions, geographical location, loan amount, and loan term. Debt consolidation loans are typically repaid within 2-7 years, and a shorter repayment period usually results in lower interest rates but higher monthly payments.
Your credit score and credit profile are the most critical factors determining your interest rate. Excellent credit scores usually qualify for the best rates, while fair credit scores may lead to higher rates.
Sample interest rates for a $7,500 debt consolidation loan repaid over three years based on credit score are as follows:
Credit Score Range | Sample Rates - Fixed APR
- Excellent (720+) | Upgrade: 7.89%
- Good (660 - 719) | Upgrade: 16.99%
- Fair (620 - 659) | Avant: 19.95%
- Bad (<620) | Avant: 29.95%
Source: iwanttorefinance.com and EvenFinancial rate table (November 2020)
Compare the Latest Personal Loan Rates
Can I qualify for a debt consolidation loan?
Lenders typically assess your ability to make monthly payments before approving your debt consolidation loan application. The three main qualifying factors considered are your credit score, income, and credit history.
Credit Score: Most debt consolidation companies have a minimum credit score requirement. A higher credit score increases your chances of qualifying. However, even with bad credit, you may still be eligible for an unsecured personal loan.
Income: Lenders evaluate the stability of your employment and income. Some lenders have minimum annual income requirements. Additionally, lenders analyze your debt-to-income ratio (DTI), which includes housing payments (mortgage or rent) and recurring debt payments (credit cards, personal loans, and auto loans).
Credit History: Your credit report reflects your past payment history. Negative records like judgments, bankruptcies, or tax liens not only impact your credit score but also make it challenging to qualify for a loan.
If you don't qualify for a loan due to low income or a low credit score, some lenders allow you to apply with a co-borrower or offer secured loans. However, it's essential to consider if a debt consolidation loan is the best option for you, especially if you have bad credit or are facing financial hardship.
Debt Consolidation Loans – Advantages and Disadvantages
Debt consolidation loans offer several benefits, particularly when accompanied by low interest rates and favorable terms. However, it's crucial to weigh the pros and cons before deciding if this option is suitable for you.
Pros:
- Simplifies bill payments by consolidating multiple debts into a single payment.
- Potential savings through lower interest rates, especially for those with good to excellent credit.
- May contribute to an improvement in your credit score.
Cons:
- Does not immediately reduce the total amount of debt owed.
- Carries the risk of accumulating new credit card debt if spending habits are not controlled.
- The best interest rates are typically reserved for those with good credit scores.
Tips for Debt Consolidation Loans
Consider the following tips to assist you in finding the right debt consolidation loan:
1. Protect your credit score: Compare rates from different lenders and submit loan requests, as most lenders pre-approve applications with a soft credit pull, which does not harm your credit score.
2. Improve your eligibility: Prior to applying for a debt consolidation loan, work on improving your credit score. Paying off small debts and reducing your debt-to-income ratio can enhance your chances of qualifying. If you have bad credit, explore options such as applying with a co-borrower or considering a secured loan.
3. Evaluate the cost-effectiveness: Calculate whether a debt consolidation loan truly saves you money. Consider both the lower interest rates and the associated administration fees. In some cases, utilizing a debt snowball plan or utilizing extra cash may yield similar or better results.
4. Affordability is key: Avoid consolidating your debts into a large monthly payment that is unmanageable. If the new payment is too high, explore alternatives such as a long-term home equity loan or a different debt consolidation option that reduces your monthly payment.
Alternatives to Debt Consolidation Loans
If you have bad credit, a debt consolidation loan may not be your only choice. When seeking an alternative, take into account your level of debt, monthly affordability, and financial hardships. Here are some alternatives to consider:
Home Equity Loan: If you own a home and have sufficient equity, a home equity debt consolidation loan can lower your monthly payment. Typically, a credit score of around 580 is required, and the total loan-to-value ratio should not exceed 80%. For example, if your home is valued at $300,000, your existing mortgage plus the additional home equity loan should not exceed $240,000
(some lenders may allow up to 85% LTV).
Non-credit-based solutions:
- Snowball Debt Payoff: If you can afford to make substantial monthly payments but do not qualify for a short-term debt consolidation loan, the debt snowball method may be an option. By adding extra payments to your current payments, you can pay off your debt faster, albeit without a lower interest rate. This method allows you to save money by reducing your principal balance quicker.
- Debt Management Plan: If you can afford to make your minimum payments but want to reduce your interest rates, a debt management plan could be helpful. With this plan, a debt management company negotiates with your creditors, primarily credit card companies, to lower interest rates and fees. You make consolidated payments into a designated account, which the debt management company then distributes to each creditor. Similar to a bad credit debt consolidation loan, this plan typically helps you pay off your debt within about five years.
- Debt Settlement: If you are experiencing financial hardship and are unable to afford your monthly payments, a debt settlement program may be an option. To qualify, you must demonstrate hardship, as creditors are unlikely to negotiate otherwise. Under this program, you stop making payments to your creditors, which may result in collection efforts such as letters, calls, and potential lawsuits. Instead, you make monthly payments into a designated account in your name. Once sufficient funds accumulate, the debt settlement company negotiates a settlement with your creditors, usually resulting in paying around 75% of your original debt.
- Bankruptcy: Bankruptcy is a more extreme alternative to a debt consolidation loan. If you are facing extreme financial hardship, filing for bankruptcy allows you to discharge qualifying debts through Chapter 7 while retaining protected assets. Chapter 13 bankruptcy, on the other hand, involves a court-supervised payment plan over four to five years, during which you repay your creditors. Bankruptcy protects you from lawsuits during this period. Given the complexity of bankruptcy, it is advisable to consult with an experienced bankruptcy lawyer.
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