A personal loan for debt consolidation is just one of several strategies for getting out of debt. With a debt consolidation loan, you get a single loan from a lender and use that to pay off your remaining debts.
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What is a debt consolidation loan?
A debt consolidation loan is a personal loan you use to pay off existing debt. When you consolidate your debt, you are combining multiple high-interest debts into one, more manageable loan with a lower interest rate. Doing this can not only help you pay off your debt faster, but the lower interest rate can also save you money.
These loans are typically unsecured, have fixed interest rates, and fixed repayment terms. When you take out a debt consolidation loan, you’ll likely receive the funds from the lender and then you’ll use that money to pay off your old debts. Other lenders may even pay off creditors directly. Then, you’ll make regular monthly payments on your new consolidation loan until it is paid off.
How debt consolidation with a personal loan work?
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.
In order to get a debt consolidation loan with favorable terms, you’ll also need to have good credit or a cosigner with good credit. The better your credit, the better the interest rate you’re likely to get on a new loan. This is important because if you can’t get a lower interest rate on a new loan than you are paying on your current debts, it doesn’t make sense to consolidate your debt.
What types of debt can I consolidate?
There are primarily three types of debt that can be consolidated:
1. Credit card debt: If you have multiple high-interest credit cards but are not able to meet all of the monthly payments, debt consolidation may be a good option. Credit card interest rates can be 20% or more, but if you can get a lower interest rate through a personal loan, you can use the loan funds to pay off your credit card debt. This can save you thousands of dollars in accrued interest.
Doing this can also significantly improve your credit score – you’ll be decreasing your credit utilization ratio and you’ll no longer have missed payments.
2. Student loan debt: While you can consolidate both federal and private student loans, you should only consolidate private loans with a personal loan. If you have high-interest private student loan debt and your new loan carries a lower APR, debt consolidation may be a good fit. Additionally, by reducing the number of outstanding accounts in your credit mix on your credit report, you may see an improvement in your score.
3. High-interest personal loan debt: If you applied for a personal loan with a lower credit score, you may have a higher interest rate that increases your monthly payment. However, if you’ve improved your score since, you may want to take out a debt consolidation loan to pay off your higher-interest personal loans and consolidate your payments. This only makes sense if you’re able to secure a lower APR.
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.
What is the best place to get a personal loan for debt consolidation?
You can get a personal loan for debt consolidation from a traditional bank, credit union, or online lender. Each type of lender comes with advantages and disadvantages. For instance, if in-person customer service and support are important to you, a bank or credit union could be a great option. However, banks and credit unions typically only work with those who have good credit. This means you will likely need a credit score of at least 690 or a cosigner to qualify with one of these lenders.
If you don’t have a great credit score or are looking for more flexibility, you may want to go with an online lender. There are many options to choose from when it comes to online lenders, and because they are online, it’s easy and convenient to see if you qualify and compare options.
Keep in mind, many lenders may not have a specific “debt consolidation” option, but offer personal loans that you can use for debt consolidation. If you can, get prequalified at multiple lenders to compare personal/debt consolidation loans and find your best option.
Related: Pre-Qualified Personal Loans
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.
Pros and cons of using personal loans to consolidate debt
Related: Pros and Cons of Debt Consolidation
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.
|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%
Data from Consumer Affairs, 2023
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:
1. 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.
Related: How to Transfer Credit Card Balance
2. 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 much lower interest rates than a personal loan. This is because home equity loans and HELOCs are secured by the value of your home. Thus, the danger of using a HELOC or home equity loan is that you could lose your house if you fail to make payments.
Related: Home Equity Loans vs. HELOC
3. 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.
Related: Debt Management Plan Pros and Cons
4. 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.
Related: Debt Settlement vs. 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.
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.
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:
1. 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.
2. 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 consolidate debt with a personal loan for:
1. 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.
Related: Personal Loans for Bad Credit
2. 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.
3. 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.
Related: Personal Loan with No Credit History
How do I qualify for a debt consolidation loan?
To qualify for a debt consolidation loan, follow these steps:
- 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.
- 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.
- 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.
- 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.
- Apply for a loan: Once you find the perfect debt consolidation personal loan, apply. 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.
Factors to consider when comparing personal loan lenders for debt consolidation
There are a few different things to consider when you’re looking for the right personal loan lender for debt consolidation.
- Interest rate. You want to make sure you’re getting a competitive interest rate so that you can save money on your loan.
- Fees. Some lenders charge origination fees, late payment fees, or prepayment penalties. You want to make sure you understand all the fees associated with the loan before you agree to anything.
- Flexible repayment options. You want to be able to choose a repayment schedule that fits your budget so that you can stay on track with your payments. If you keep these things in mind, you should be able to find a personal loan lender that fits your needs and helps you get out of debt.
- Type of loan. You’ll also want to consider whether you’re looking for a fixed-rate or variable-rate loan.
How to find the right personal loan lender for debt consolidation?
If you’re thinking about using personal loans for debt consolidation it’s important to find a lender that offers the right terms for your needs.
- Start online. One of the best places to start your search is with an online personal loan marketplace. These platforms allow you to compare offers from a variety of lenders, which makes it easy to find the best personal loan for your needs.
- Check your local bank or credit union. You can also check with your local bank or credit union to see if they offer personal loans for debt consolidation.
Keep in mind that you may need to have good credit to qualify for the best rates and terms. If you think a personal loan is right for you, compare the best personal loans from reputable lenders.
What should you do before you apply for a debt consolidation loan?
There are a number of steps you can take to improve your chances of being approved for a debt consolidation loan.
1. Monitor your credit score and report: Make sure there are no errors and if there are contact the individual credit reporting bureaus (Experian, Equifax, TransUnion) to have them removed immediately.
2. Increase your income: If you can bring in more money by either picking up a side hustle or working overtime, this can help lower your DTI ratio.
3. Don’t fall behind on other payments: Keeping up with your other loan payments and lines of credit will only make you a more promising candidate to your lenders.
How do I apply for a personal loan to consolidate debt?
After you’ve checked your credit score, assessed your existing debt and financial situation, and researched and compared lender options, you’ll choose the lender that’s right for you. Then, it’s time to fill out and submit the loan application.
In order to make the loan application process go as smoothly as possible, you should prepare information and documentation ahead of time that will be needed for the application. Examples of this include:
- Bank account information such as your routing number and account number.
- Cosigner information (if your credit score requires one or you prefer to have one)
- Information about the loan, including the loan amount, purpose of the loan, desired term, etc.
- Personal information like your name, address, phone number, Social Security number, date of birth, etc.
- Proof of employment and income.
Also, because the purpose of the loan is for debt consolidation, be prepared with those account numbers, balances, and lender information as well.
You’ll then find the loan application on the lender’s website. While each lender and application can vary slightly or require different information, in general, you’ll be required to provide the information above.
Then, before submitting the application, you’ll review the loan’s terms and conditions, which can include:
- Repayment period
- Monthly payment
When you’re ready, you’ll submit the application. If approved, you’ll be notified by the lender and sent final loan documents to be reviewed and accepted. After completing this, the loan funds will be transferred into your account. Or the lender may automatically pay off your existing debt and then you’ll just start making repayments for your new loan.
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.
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.
Applying for a consolidation loan is a straightforward process, but it can take a few weeks to get approved. The first step is to gather all the necessary documentation, including statements from your current lenders and proof of income. Once you have everything in order, you can begin shopping around for personal loans. It’s important to compare multiple offers in order to get the best terms and rates. Once you’ve found the right loan, you’ll need to complete an application and provide additional documentation, such as your credit report. Once everything has been reviewed, you should receive notice of approval within a few weeks.
While debt consolidation can be a helpful tool for some, there are also situations where it can be a bad idea. One reason to avoid debt consolidation is if you have personal loans with low interest rates. By consolidating these loans into a new loan with a higher interest rate, you will end up paying more in interest over time. Another reason to avoid debt consolidation is if you have trouble managing your finances. If you consolidate your debts but continue to spend more than you can afford, you will simply end up with even more debt. As a result, it’s important to be honest with yourself about whether you are likely to stay on track before consolidating your debts.
High interest rates can have a major impact on your debt. If you have a lot of debt, you may be paying hundreds or even thousands of dollars in interest every year. For instance, if you have a $2000 balance on your credit card with a 20% APR, and you only make a minimum payment of $50 a month, it will take you more than five years to pay off your credit card (if you don’t accumulate any more debt) and you’ll pay more than $1200 in interest. If your interest rate was only 13%, you would pay less than half that amount of interest and pay off the debt nearly a year sooner.
One of the most common questions people have when they’re struggling with debt is whether or not debt consolidation can help them save money. The answer to this question depends on several factors, including interest rates and the amount of debt you have. However, in general, consolidating your debt can help you save money by reducing the interest you’re paying on your debts. For example, let’s say you have two credit cards with interest rates of 15% and 20%. If you consolidate your debt onto one card with an interest rate of 18%, you’ll instantly reduce the interest you’re paying on your debt. Additionally, consolidating your debt can help you save money by making it easier to stay on top of your payments. However, if you consolidate your debt onto one account, you’ll only need to make one payment each month. This can help you avoid missed payments and late fees, which can add up quickly. As a result, consolidating your debt can be a helpful way to save money.
With good credit and a low DTI ratio, you should be able to get a personal unsecured loan to consolidate debt. This way, you won’t need to put your home, car, or savings at risk to pay off your debt.
“They were so preoccupied with whether or not they could, they didn’t stop to think if they should.” Yes, that’s a quote from Jurassic Park, but it applies here, too. Technically, yes you can have two consolidation loans or even consolidate a consolidation loan, though it might depend on the lender. But the real question is: Why would you want to, and is that really the best way to deal with your debt?
As you would for the first debt consolidation loan, now you need to figure out if you can also afford to make this new set of payments on time every month and you need to factor in fees such as origination, balance transfer, annual and closing. This could also put a temporary dent in your credit score as a second debt consolidation loan will require a hard inquiry. You may not even be eligible for a second loan and even just attempting a second loan could raise major red flags.
Applying for a debt consolidation loan can cause a temporary dip in your credit score, which could affect your approval odds and terms of your mortgage. However, if you apply for the consolidation loan way before buying a home, your credit score should have time to recover—and, if you’ve eliminated any of your debt, you might have an easier time getting approved for a favorable mortgage.