Is a personal loan a good idea for debt consolidation?

A personal loan can be used for just about anything, including consolidating debt. If you have multiple debts, consolidating them with a personal loan can help save you time and money in the long run. Using personal loans to consolidate debt is a good idea if:

  • You have multiple debts with larger amounts and high interest.
  • You have a good to excellent credit score.
  • You can get a new loan with more favorable terms.
  • The interest rate on the consolidation loan is lower than your current debt..
  • You’re able to repay the consolidation loan and get your spending under control so you don’t fall into debt again.

How debt consolidation with a personal loan works

When you apply for a personal loan or debt consolidation loan, the goal is to use the new loan to pay off multiple existing debts. Doing so streamlines payments to a new single monthly payment with what will hopefully be more favorable payment terms and a lower interest rate.

There are certain eligibility criteria you’ll need to meet to get a personal loan for debt consolidation, including:

  • Be at least 18 years old
  • Have legal proof of residence in the United States
  • Have a verifiable bank account that’s in good standing, i.e., not in foreclosure or bankruptcy
  • Maintain a reasonable debt-to-income (DTI) ratio of 40% or lower

Ready for the next step?

We’re here to help. Let us match you with personal consolidation loan options based on your goals and debt info.

How do I qualify for a personal loan debt consolidation?

To qualify for a debt consolidation loan, follow these steps:

  1. Check your credit report and score: If you have poor credit, your interest rate could be even higher than the annual percentage rate (APR) on your existing debt. That’s why it’s important to check your score before you apply for a debt consolidation loan. The three major credit bureaus (Equifax, Experian, and TransUnion) are required to provide you with a free copy of your credit report once a year if you request it.1 To avoid higher interest rates if you have bad credit, it might be worth considering a secured personal loan or a personal loan with a cosigner.
  2. Assess your existing debt: To understand which loans you’re trying to qualify for, you’ll need to know how much debt you need to consolidate. It’s best to create a list that outlines each debt, how much you owe, and the interest rate.
  3. Review loan options: Personal loans are available from online lenders, banks, and credit unions. As you compare, look for reputable lenders. And if you don’t trust yourself to pay off creditors if you receive the loan money first, find a lender that will pay creditors directly.
  4. Pre-qualify for a personal loan: The pre-qualification process means you can see how much personal loan you may be eligible for and the projected interest rate. Plus, a pre-qualification doesn’t trigger a hard credit inquiry or hurt your credit score.
  5. Apply for a loan: Once you find the perfect debt consolidation personal loan, submit an application. Then, the lender will decide whether to approve the application. If approved, you can sign to complete the loan, make sure existing creditors have been paid, and begin making payments on the new debt consolidation loan.

Best personal loan rates for debt consolidation

The key for debt consolidation loans to work is making sure the interest rate is lower than the APR on your existing debt. While rates vary from lender to lender, you can get a good idea of what your APR will be by knowing your credit score.

Credit score Average personal loan APR
Excellent (720-850) 10.3%-12.5%
Good (690-719) 13.5%-15.5%
Average (630-689) 17.8%-19.9%
Bad (300-629) 28.5%-32%

Pros and cons of using personal loans to consolidate debt

Pros Cons
  • You can lower your interest rates
  • If you have a poor credit score, you may not qualify for a lower interest rate loan
  • Making your new payments on time every month can help boost your credit score
  • There are often high fees
  • You’ll have fixed, predictable monthly payments
  • A debt consolidation loan won’t change existing spending habits that put you in debt
  • Debt repayment will be simpler with only one monthly payment instead of multiple

How to consolidate debt with a personal loan for:

Bad credit: Those working to improve their credit score may want to consider a secured loan that’s backed by collateral or wait until credit improves to apply for a debt consolidation personal loan. That’s because the interest rates on a personal loan for people with bad credit could be higher than the loans you’re consolidating.

Good credit: Borrowers with good credit tend to receive the most favorable rates on a personal loan. They may also qualify for a 0% APR balance transfer credit card.

No credit history: It’s unlikely that borrowers with no credit history would need a debt consolidation loan since they’ve likely taken out loans previously. But these borrowers would follow a similar process to those with bad credit by looking to secure a loan using a house or car or waiting to establish a credit history before applying.

Debt consolidation vs. personal loan: Which is better

Since the terms debt consolidation loan and personal loan are used interchangeably, many people wonder, “is a debt consolidation loan a personal loan?” A debt consolidation loan is a specific type of personal loan earmarked to consolidate debt. While a personal loan is an unsecured loan that can be used for any reason, a debt consolidation loan is used for the purpose of combining debts.

Which is the better option for you depends on several criteria, like:

  • Credit score: Depending on your credit score, you may qualify for a lower interest rate on a debt consolidation loan that will help you save money.
  • Loan purpose: Personal loans can be used for various financial goals, including financing home renovations or paying for a wedding. A debt consolidation loan is a personal loan with the primary purpose of consolidating debt.

How to find the right personal loan lender for debt consolidation

Comparing lenders is key to discovering which loan is best for your individual needs. If you think a personal loan is right for you, compare the best personal loans from reputable lenders.

Does a personal loan for debt consolidation hurt your credit?

A personal loan has the power to both help and hurt your credit score. The result depends on your ability to manage the loan and its repayment responsibly.

You may see a dip in your credit after you initially apply for a debt consolidation loan due to the hard credit inquiry the lender makes. But that kind of credit dip tends to rebound quickly. A personal loan can also hurt your credit if you regularly make late payments or miss them entirely.

If your debt consolidation loan lowers your overall credit utilization (the ratio of credit you use vs. what you have available), then it can have a positive impact on your score. And you may see a bump in your score if your personal loan adds a new type of loan to your existing credit mix.

Alternatives to a debt consolidation personal loan

For those who aren’t convinced that a personal loan or debt consolidation loan is the best option, here are several alternatives to consider:

Balance transfer credit card

A balance transfer credit card is an alternative option for those with good credit. Most balance transfer cards have an introductory 0% APR offer for some period of time, typically ranging from 12 to 21 months. The goal is to pay off your debt before the introductory period ends. Interest rates on balance transfer cards tend to be higher than those on personal loans.

Home Equity Line of Credit (HELOC) or Home Equity Loan

A HELOC and a home equity loan are loan sources secured by your home. These alternatives to debt consolidation loans generally have a much lower interest rate than a personal loan. But the danger of using a HELOC or home equity loan is that your house is on the line if you fail to make payments.

Debt Management Plan (DMP)

With the help of a non-profit credit counseling agency, you can receive direction in managing debt. A credit counselor can also help negotiate interest rates and payments with creditors, in addition to helping you understand budgeting and how to prioritize debt repayment. If a non-profit credit counselor doesn’t believe they can help you eliminate the debt entirely, they may recommend debt settlement or bankruptcy.

Debt settlement

Debt settlement differs from debt consolidation in that you’ll attempt to get creditors to settle for less than the amount you owe. Unfortunately, this means of debt management can damage your credit score. That’s because you’ll go through a period of non-payment before negotiating a settlement amount.

Bankruptcy

Bankruptcy is often the last option to consider when it comes to consolidating debt. That’s because it will stain your credit report for up to seven to ten years. And while your debt may be forgiven, you could struggle to get back on stable financial footing.

Refinancing

Debt refinancing is similar to debt consolidation, but it’s an option to consider only for your secured debts. When you refinance, you’re essentially swapping out your existing loan for one that has a better interest rate and more favorable terms. For example, when you refinance a mortgage, you’re replacing the existing mortgage with another that hopefully has better rates.

Ready for the next step?

We’re here to help. Let us match you with personal consolidation loan options based on your goals and debt info.

FAQs

Yes, you can consolidate personal loans. If you have multiple forms of debt, including personal loans, with high balances and interest rates, you may want to consider consolidating them. You can use a debt consolidation personal loan to simplify your monthly payments and ideally lower your interest rates, saving you money and helping you pay off your loans faster.

Pros of personal loans:

  • Fixed interest rates
  • Most are unsecured
  • Interest rates are lower than other options
  • Flexible term rates
  • Can be used for just about anything
  • High borrowing limits, sometimes up to $100,000
  • Predictable monthly payments
  • Funds are deposited quickly

Cons of personal loans:

  • Higher APRs for unsecured loans
  • Likely need a good to excellent credit score
  • Fees
  • Can lower credit score if you miss or skip payments
  • Secured personal loans can put your assets at risk
  • Applying triggers a hard inquiry, which can drop your credit score

Related Reading: Everything You Need to Know About Personal Loans

The best company for personal loans to consolidate debt depends on your individual situation. It’s important to compare lenders before submitting a loan application and pay particular attention to their loan terms, loan amounts, average interest rates, credit score minimums, and customer service reviews. If you can, get prequalified for the loan for the best individual estimate to help you compare more accurately.

Personal loan rates depend on your credit score, credit history, annual income, other existing debt, and other factors depending on the lender. Typically, the higher your credit score, the lower the rate you may qualify for. Many lenders start personal loan rates as low as 6%.

Related Reading: How to Find the Best Debt Consolidation Loan Rates

You can get a personal loan for debt consolidation from a traditional bank, credit union, or online lender. If in-person customer service and support is important to you, a bank or credit union could be a great option, but you likely need an excellent credit score to qualify. If you don’t have a great credit score, or are looking for more flexibility, you may want to choose an online lender. The important thing is to get prequalified if you can in order to help you compare options tailored to your situation.

In order to get a home equity loan, you must own your home. While HELs often have lower interest rates than personal loans, you are risking losing your home if you fail to make the payments. On the other hand, personal loans are usually unsecured, meaning you won’t be putting your assets at risk.

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