If you’re like many Americans today, your current financial health is not as robust as you would like and you may be carrying quite a bit of debt. You’ve likely looked into ways to make more money and reduce spending, but sometimes the math just doesn’t add up. It’s at times like these that you may want to learn more about how to get a debt consolidation loan.
The ease of a 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. But before you set the wheels in motion, you’ll want to do some research and determine whether it’s actually your best option.
Below we’ll answer the most frequently asked questions about debt consolidation loans and how to get the best deal at the right time for your situation. We’ll explain exactly how these loans and programs work, where to find them, and help you decide whether you really should pursue one.
What exactly is a debt consolidation loan?
A debt consolidation loan allows you to consolidate or combine your debts (usually from credit cards, but also medical bills and some student loans) into one loan. The new loan should have two things going for it:
- A lower interest rate than the rates on your current debt
- A predictable, regular payment to the lender each month
Another benefit is having a specific end date, which may help you plan and budget more effectively and even motivate you to keep going with the payment plan.
The longer you wait to research debt consolidation options and start turning things around, the deeper your financial hole will be, and the harder to climb out.
When’s the best time to get a loan to consolidate debt?
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, that means you’re paying compound interest on the balance (or balances). If you’ve already missed payments, you could be paying late fees, which are then adding to your overall balance as well.
The longer you wait to research debt consolidation options—or other debt relief options—and start turning things around, the deeper your financial hole will be, and the harder to climb out.
Where can I find a debt consolidation loan?
You have several options, but keep in mind that your choices may be more limited if you have bad credit. While these options differ, they all have one thing in common: you’re borrowing and going into new debt to pay off old debt. If you obtain a consolidation loan and default on the loan, your finances will most likely be in an even worse place than they are currently.
The key difference between an online lender and a traditional bank is that today’s online lenders generally make the borrowing process much easier and faster.
Banks and credit unions
This type of debt consolidation 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
The key difference between an online lender and a traditional bank is that today’s online lenders generally 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 for approval. Depending on the lender, you may even have to go in-person to meet with the officer before the loan is finalized.
Many online lenders do offer debt consolidation loans and typically will check your credit using what’s called a “soft credit pull,” which won’t adversely impact your credit as a “hard credit pull” may.
- Easier process, quicker approval decision
- Loan terms are disclosed sooner than with a bank
- Easy online comparison shopping
- Loan deposited directly into your bank account
- 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
Some consumers decide to get a debt consolidation loan from peer-to-peer (P2P) or group lenders, such as Prosper or Lending Club, which may 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 middleman fees. Sites that facilitate these types of loans set the rates and terms, based on the borrower’s creditworthiness. P2P lenders use these sites in order to get better returns than they would from a savings account or CD, while borrowers can seek more favorable terms than they might get from traditional lenders.
- Fast, hassle-free application process
- Fixed interest rate
- No collateral needed since loan is unsecured
- No hidden fees
- No prepayment penalties
- Your identity is unknown, so lenders can’t make direct contact (may limit bias)
- Requires good credit if you want to get a low interest rate
- If you have bad credit, you probably won’t qualify at all
- There may be fees for commissions and transactions, which will vary by P2P lending platform
How do I choose the right lender?
You may be anxious to get a loan signed, sealed and delivered, but you really want to spend time researching lenders. It’s important you know what you’re getting into and that you find a reputable lender who can offer you the best terms.
One good way to find reputable debt consolidation loan providers (and to rule out the disreputable ones) is to read what other consumers say about them in the reviews. Once you’ve weeded out the companies to avoid, it is important to 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. Longer terms may suit your budget better and reduce your monthly payments, but will 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.
- Prepayment penalties. Ask upfront if there are prepayment penalties. 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.
- Customer service. You want to be able to speak openly about your situation and get clear answers to your questions. Check the reviews to see which ones come out on top for this aspect.
How do I avoid predatory lenders?
If you decide to get a debt consolidation loan, 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 who may be feeling desperate. 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. Instead, they make their money by using some or all of these tactics:
- Charging high fees and interest rates—sometimes in the triple digits
- Charging an origination fee without granting the loan
- Offering one rate then increasing it significantly once you’ve shown interest
- Rolling hidden costs and fees into the loan
- Insisting that you buy insurance
- Trying to “flip” or refinance the loan to extract more fees from you
- Rushing the paperwork, using pressure tactics, creating a sense of urgency
- Offering the loan without checking your credit
What if I 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 DTI 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, the rates may be so high that it wouldn’t be worth it and you’d end up paying more than you’re already paying on your credit cards.
What else do I need to consider?
If you’ve found a reputable lender and chosen a fair loan with appropriate terms and rates, you’ll be able to pay off your debts and start the process of becoming financially healthy. But before you get too comfortable, 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.
How do I know if debt consolidation is the right choice for me?
Many people with different financial situations may decide it’s a good idea to get a debt consolidation loan, but it’s not the best debt-clearing strategy for everyone.
It could be the right choice if you:
- Are in significant debt and it’s growing
- Currently pay high interest rates on your cards
- Have good to excellent credit
- Are confident you will be able to pay back the debt in full
- Think you can change the habits that got you into debt in the first place
But it may not be the best option if you:
- Have poor or bad credit
- Are still experiencing the hardship that caused your debt problem
- Have a debt-to-income (DTI) ratio that is too high
- Are unable or unwilling to change your spending habits
Could debt settlement be a better solution for me?
Debt settlement makes more sense than a debt consolidation loan if your credit is not good and you can check off several, if not all, of the points listed above. Often, debt settlement may be a smart choice if you’ve considered bankruptcy and have more than $10,000 in unsecured debt.
This method is accomplished by negotiating with your creditors, usually with the help of a debt settlement company, in order to have your debt balances lowered. If you work with a debt settlement company, they’ll typically advise you to stop making payments and instead deposit them into a special account. Once you’ve accumulated enough money, you’ll use it to pay off the lowered balances. Since we began in 2002, the Freedom Debt Relief program has used the process of debt settlement to help hundreds of thousands of our clients overcome debt faster and for less than making minimum payments.
Once these negotiated balances are paid off, the creditor(s) will assume the debt fully paid. Drawbacks include a temporary hit to your credit score, calls from debt collection agencies, and possible legal action. However, it could be the best possible option for certain situations.
Get professional help with your debts
If you are struggling with debt or are just worried about falling behind on payments, you may think it’s time to get a debt consolidation loan. However, you have other options. Freedom Debt Relief can help you understand these options, including our debt relief program. Our Certified Debt Consultants can help you find a solution that will put you on the path to a brighter future. Find out if you qualify right now.