Debt Consolidation Loans

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Debt Consolidation Loan Options

Debt consolidation loans can be a good idea for many consumers, saving you money on interest and monthly payments, and potentially increasing your credit score.

Debt consolidation loans are used to pay off and simplify existing debt by consolidating multiple payments and accounts into a single account with one lender and payment. They are a specific type of personal loan. Depending on your creditworthiness, you may be able to receive a lower interest rate on a debt consolidation loan than you are currently paying on your debt, saving you money on monthly payments and overall interest. Another option for lowering your monthly payment is with a long loan term. However, a longer loan term means you may pay more interest total. Debt consolidation loans can be a good choice as this type of loan may help lower monthly payments, improve your credit score, and either lower or eliminate debt. 

Credit Card Debt

Credit cards are the most common type of debt consolidated. Personal loans, student loans, medical bills and payday loans are other common types of debt consolidated with loans.


Unsecured loans are more common, but you can use a secured loan for unsecured debt, such as a home equity loan used for credit card debt consolidation.

How Debt Consolidation Loans Work

There are two types of debt consolidation loans: secured and unsecured. The primary difference between the two is that secured debt consolidation loans use collateral, while unsecured loans do not. Unsecured loans are more common, but you can use a secured loan for unsecured debt, such as a home equity loan used for credit card debt consolidation.

Unsecured debt consolidation loans don’t require collateral, and they usually have easier approval requirements than secured debt consolidation loans. Unsecured debt consolidation loans can have income requirements as low as $24,000 annually, debt-to-income ratios of up to 50 percent and minimum FICO credit scores as low as 600. Unsecured debt consolidation loans are offered online through banks and marketplace lenders. This makes applying for a loan convenient, and some providers offer instant approval online, so you can find out right away if a loan is going to work for you. While unsecured debt consolidation loans can be easier to obtain and more convenient than secured debt consolidation loans, they generally have higher interest rates, so they are more expensive to pay down than a secured debt consolidation loan.

Getting a debt consolidation loan is a major financial decision and one that shouldn’t be taken lightly. Before you apply for a debt consolidation loan, you should consider alternatives, figure out how you’ll make payments and make sure you’re finding the best rate available. Debt consolidation loans are offered by private banks and peer-to-peer marketplace lenders. Traditional banks are typically more well-established but can have higher qualification requirements and costs. Often, traditional banks require a minimum FICO credit score of 600. Some have prepayment penalties and a 1 to 5 percent origination fee. It’s a good idea to look for lenders that offer no prepayment penalties or origination fees.

Advantages of a Debt Consolidation Loan

Debt consolidation loans can be a good idea for many consumers, saving you money on interest and monthly payments, and potentially increasing your credit score.

Interest savings: If you have multiple sources of debt with high annual percentage rates, you can save on total interest if you get a debt consolidation loan with a lower rate. For example, if you consolidate two credit card balances with APRs of 16.24 and 23.99 percent into a debt consolidation loan with a 15 percent APR, you will save on interest. Interest rates can be a lot lower than that of credit card interest rates, so you’ll save money in interest costs. Loans have a finite amortization period, generally, not longer than a few years which is something you won't find with credit cards.


Lower monthly payment: A debt consolidation loan can help you avoid missed payments and defaulting on issuer agreements, even if you need to choose a longer term length. With a debt consolidation loan that lowers your monthly payments, but not your interest, you will pay more in total but have payments that are easier to handle. That way, you’re less likely to be subject to additional fees and penalty APRs that come with missing a payment.


Improved credit score: Your credit score may increase with a debt consolidation loan since you’ll be eliminating score damaging revolving debt and changing it into practically benign installment debt. As long as you don’t charge up your cards again and you make your payments on time you’ll be happy with your new higher scores. By taking out a new loan and leaving consolidated accounts open but unused, you will have more total credit available. This results in a lower credit utilization rate, which can increase your credit score.

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