When Is It a Good Idea to Get a Debt Consolidation Loan?

Like many Americans today, your current financial health is not as robust as you would like. In fact, you’re carrying quite a bit of debt, which is creating significant stress in your life. And it’s not like you’re ignoring the situation—you’ve looked for ways to make more money and tried to spend less, but sometimes the math just doesn’t add up. It’s at times like these that a debt consolidation loan can look like the only way out of the situation and you may be anxious to get it going right away.

The simplicity of the consolidation loan makes it an appealing solution—you get a loan and pay off your outstanding debt. Of course, you still have the debt to pay, but you may get better terms and lower interest rates on the loan, which should make it more affordable and fit your budget better.

Naturally, you’re keen to alleviate your debt-related stress so this may seem like a no-brainer. But before you set the wheels in motion, it’s a good idea to do some research—actually a lot of research. Before you commit to any debt consolidation company, you want to be sure that they’re the right one for you and can offer you the best terms and interest rates.

Below we’ll answer the most frequently asked questions about debt consolidation programs and outline everything you’ll need to know to ensure you get the best deal at the right time for your situation. We’ll explain exactly how debt consolidation programs work and where to find the most advantageous loans.

What Exactly Is a Debt Consolidation Loan?

You may have heard of different types of debt relief solutions available, like debt settlement or debt consolidation, and wondered what the terms mean. A debt consolidation loan is a loan that allows you to consolidate or combine your debts (usually from credit cards but could also be from medical bills or student loans too) into one loan.

The new loan will (hopefully) have two things going for it: It’ll have a lower interest rate than the rates on your cards and a predictable, regular payment to the lender each month. Another benefit of a debt consolidation program is that you’ll have a specific end date, which may help you plan and budget more effectively and possibly motivate you to keep going with the payment plan.

When’s the Best Time to Get a Debt Consolidation Loan?

If this type of loan makes sense for you, the answer to the timing question should be, “as soon as you can.” If your credit card debt is mounting and you’re spending more than you’re able to pay off each month, you’re paying compound interest on the balance(s). And if you’ve already missed payments, you could be paying late fees that are adding to your overall balance, too. The longer you wait to research debt consolidation companies and start turning things around, the deeper your financial hole will be and the more money you’re going to have to shell out.

Where Can I Find a Debt Consolidation Loan?

When it comes to finding a debt consolidation loan, you have several options—keep in mind that if you have bad credit, your choices may be more limited. (We’ll go into that in more detail later.)

While the various options differ in their benefits and drawbacks, they all have one thing in common: You’re borrowing (going into new debt) to pay off old debt. If you obtain a consolidation loan and you don’t keep to the payment schedule and default on the loan, your finances will likely be in an even worse place than they are currently.

For the lenders to be able to give you quotes on your loan amount and interest rate, they’ll need to pull your credit report. However, at this stage it’s usually a “soft pull,” meaning it won’t affect your credit score. This differs from the “hard pull” lenders do once the loan funding process starts, which will cause your score to dip.

Banks and Credit Unions

Even with the other newer borrowing options now available, consumer demand is also on the rise for personal loans from banks and credit unions. At the end of the third quarter, 2015, the number of people holding secured and unsecured personal loans stood at 27.34 million, which was up 18 percent from 22.5 million in the 3rd quarter of 2013.

This type of personal loan is as basic as it gets. You borrow an amount of money and agree to pay it back in monthly installments over a certain length of time with interest.

This type of personal loan is as basic as it gets. You borrow an amount of money and agree to pay it back in monthly installments over a certain length of time with interest. The interest you pay is calculated using your credit history and score. The loans can be secured or unsecured. If secured, you’ll need to put up collateral like your car or home. If unsecured, no collateral is required.

  • Good method for consolidating credit card debt
  • Typically lower interest rates than credit cards
  • Specific end date for loan repayments
  • Easy to apply for and quick decision
  • You’re not paying off debt—just transferring it
  • Good credit is required in order to get the best loan rates
  • You could lose collateral if you default on a secured loan

Online Lenders

The key difference between an online lender and a traditional bank (either brick and mortar or online) is today’s online lenders make the borrowing process much easier and faster. You may be able to complete a traditional bank’s loan application online, but chances are you’ll have to wait a certain amount of time until one of the bank’s loan officers approves your application. Depending on the lender, you may even have to go in-person to meet with the officer before the loan is finalized.

  • Easier process, quicker approval decision
  • Know the terms of the loan faster than with a bank
  • Easy online comparison shopping
  • Loan deposited directly into your bank account
  • Safer, as no collateral needed for unsecured loans
  • As with all consolidation loans, missed payments will cause credit score to decrease
  • Need to watch out for scams
  • May charge an origination fee
  • Not available in all states

Peer-to-Peer Lenders

Many consumers looking for a debt consolidation loan find peer-to-peer (P2P) or group lending to be an appealing alternative to traditional banks. Usually, you’ll find more flexible options and an easier approval process than from a bank. You’ll be matched directly with individuals with funds to lend, which means you may also avoid having to pay middleman fees.

  • Fast, hassle-free application process
  • Fixed interest rate
  • No collateral needed since loan is unsecured
  • No hidden fees
  • No pre-payment penalties
  • Your identity is unknown, so lenders can’t make direct contact
  • Requires good credit if you want to get a low interest rate
  • If you have bad credit, you probably won’t qualify at all

How to Get a Loan with Bad Credit

How Do I Choose the Right Lender?

If the timing’s good and a debt consolidation loan looks like the right choice for you, the next step is to do your research. You may be anxious to get a loan signed, sealed and delivered, but this is not the step to skip! It’s important you know what you’re getting into and that you find a reputable lender who can offer you the best terms.

This is where the internet’s your friend—you’ll be able to compare multiple sources quickly. The best way to find reputable lenders (and to rule out the disreputable) is to read what other consumers say about them in the reviews. Once you’ve weeded out the companies to avoid, make sure you get multiple quotes from different lenders so you can compare the interest rates and terms.

Criteria to Consider

  • Payment Terms: You’re looking for an interest rate lower than the rates on your cards, but you need to be comfortable with the payment terms as well. If the terms are shorter, you’ll be paying on a more aggressive schedule, which is great if you can keep up, because you’ll be debt free sooner. However, longer terms may suit your budget better. This will reduce your monthly payments but prolong your repayment schedule.
  • Lender’s Fees: Compare the APR (Annual Percentage Rate) of the loan and not just the interest rate. Make sure the origination fee (charged by most lenders) is included in the APR.
  • Pre-Payment Penalties: When comparing companies ask upfront if there are pre-payment penalties. If there are, consider this a huge red flag. Avoid debt consolidation companies that write penalties into the contract if you end up paying off your loan sooner than the dates agreed upon.
  • Rate Discounts: You may be able to get a discount if you have a co-applicant on the loan or if you set up automatic monthly payments from your checking or savings account. Our sister company FreedomPlus even offer discounts on debt consolidation loans if you let them pay off your creditors directly and if you have over $40,000 in retirement assets.
  • Customer Service: How do the lending companies rate for customer service? You want to able to speak openly about your situation and get clear answers to your questions. Does the company you’re considering do everything online or will you have access to a human on the end of a phone should you need or prefer it? Check the reviews to see which ones come out on top for this aspect.

How Do I Avoid Predatory Lenders?

Regardless of which debt consolidation solution you go with, it’s important to choose a reliable company with a good track record. Lenders with unsavory business practices are only too keen to take advantage of consumers struggling with debt who may be feeling desperate. These predatory lenders make it easy for you to get approved because they’re not necessarily interested in making money through repayment and interest charges like reputable lenders are. They make their money by using some or all of these tactics:

  • Charge high fees and interest rates—sometimes in the triple digits!
  • Charge origination fee then not grant the loan
  • Offer one rate then increase it significantly once you’ve shown interest (bait and switch)
  • Roll hard-to-detect costs and fees into the loan (padding or packing)
  • Insist that you buy insurance
  • Try to “flip” or refinance the loan to extract more fees from you
  • Rush the paperwork, use high pressure tactics, and create a sense of urgency
  • Offer the loan without checking your credit

What If You Have Bad Credit?

If your credit’s not good, a loan from a debt consolidation company may not be the best solution for you. If your debt-to-income (DTI) ratio is too high, your chances of being approved by reputable lenders are low. And even if a lender does agree to give you a loan, chances are the rates would be so high that it wouldn’t be worth your while. You’d end up paying more than you’re already paying on your credit cards.

If your credit’s not good, a debt consolidation loan may not be the best solution for you.

If the above describes your situation, debt settlement may be a smarter option for you—it’s not a loan, so good credit isn’t required. Debt settlement is also the type of debt solution that Freedom Debt Relief has been providing for consumers since 2002. Through debt settlement, we negotiate on your behalf with your creditors to get them to agree to you paying a lesser amount than that total debt due. This lower amount is then paid off and the process repeats with all your creditors until they have all settled or forgiven your debt completely. At completion of the program, your debts are cleared or “forgiven.”

Learn why your debt-to-income ratio matters

And why you need to monitor it regularly.

What Else Do I Need to Consider?

So, you’ve found a reputable lender and chosen a fair loan with decent terms and rates. This will allow you to pay off your debts and start the process of becoming financially healthy. Well done! But before you sit back and start basking in the debt-free glow, it’s important to make sure you never get into the same financial predicament again. This is when you need to take a very close look at your spending habits and resolve to make some changes, because if you keep doing what you were doing before, you could end up right back where you started. Also, if you chose to take out a debt consolidation loan to solve your debt issue, you have the added burden of the loan repayment as well.

How Do I Know if Debt Consolidation is the Right Choice for Me?

While debt consolidation makes sense for many people with different financial situations, it’s not the best debt-clearing strategy for everyone (no single solution is).

A debt consolidation loan could be the right choice if:

  • You’re in significant debt and it’s growing
  • You’re paying high interest rates on your cards
  • You have good to great credit
  • You are confident you will be able to pay back the debt in full

But a debt consolidation loan may not be the best option if:

  • You have poor or bad credit
  • You’re still experiencing the hardship that caused your debt problem (Ex: divorce or job loss)
  • Your debt-to-income (DTI) ratio is too high
  • Your credit score’s too low
  • You’re unable or unwilling to change your spending habits

Could Debt Settlement Be a Better Solution for Me?

Debt settlement as a debt relief solution makes more sense for those whose credit is not good and who can check off several, if not all, of the points listed above. It can also be a smart choice if you’ve considered bankruptcy and have over $10,000 in unsecured debt.

One of the leaders in the field is Freedom Debt Relief. Since 2002, our skilled negotiators have helped hundreds of thousands of Americans resolve billions of dollars in consumer debt—much more than any other debt settlement company in the United States. Part of the Freedom Debt Relief program’s success lies in our “people-first” philosophy.

The goal of our highly trained counselors is to help you find the best way forward to overcome your debt and create a brighter financial future. Our counselors will work hard to help you find the right strategy—even if it’s not one of our debt relief programs—without any high-pressure sales tactics. Plus, the Freedom Debt Relief program is tailored to you. We’ll consider your debt, your situation, and your financial goals to create a custom program that will give you the best chance at success.

Regardless of whether you choose debt consolidation or debt settlement as the answer for your debt, you should make a budget (and stick to it). It can take real discipline, but once you get in the habit of sticking to a budget, it should get easier. Cutting out extras, staying within your spending limits, and growing your savings instead of growing your debt makes life easier and less stressful in the long run.

Debt Consolidation Loans and Debt Settlement: a Recap

A debt consolidation loan is a way to combine all your credit card debts into one manageable loan, with one monthly payment and a lower interest rate. This type of loan makes managing your finances much easier and helps you avoid unpleasant calls from collection agencies.

A debt consolidation loan makes the most sense for consumers who have a fair amount of debt, but still have decent credit and a reasonable debt-to-income ratio (DTI). It’s also more suited to those who have the discipline to stick to a budget and curb over-spending tendencies.

A debt consolidation loan is best for people who have the discipline to stick to a budget and curb over-spending tendencies.

Debt settlement could be a better solution if your unsecured debt is larger than $10,000, you don’t have great credit, you’re looking for a low monthly program payment, and you want to truly put the debt behind you—not just move high interest debt over to the lower interest debt of a debt consolidation loan.

If you’ve decided that a debt consolidation loan is not the right choice for you, consider looking at the debt settlement program offered by Freedom Debt Relief. We’ve been offering our program since 2002, and are the largest, most established debt settlement company in America. Over half a million American consumers have enrolled in our program, and we have settled over 9 billion in consumer debt. Just give us a call at 800-230-1553 and one of our Certified Debt Consultants would be happy to walk you through our program and help you see how much it could reduce your debt and how quickly it could help you get out of debt. Or, you can get a free estimate of how much the Freedom Debt Relief program could reduce what you owe.

Regardless of which approach you ultimately choose, you’ve already taken a step in the right direction by starting to explore the options available. There’s no one-size-fits-all solution, as everyone’s situation is unique.

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