Simplify your finances with personalized debt consolidation offers that roll multiple payments into one.
Being in debt can be overwhelming, especially in the current climate of rising interest rates with credit card debts at record levels. It can stop you from achieving your financial dreams and seriously dampen your financial picture. It gets worse when you’re trying to keep track of balances, payments, fees, and interest rates on everything from credit cards to auto loans. That’s where a debt consolidation loan comes in.
Debt consolidation loans aren’t a magic wand that takes care of all your debt right away, but it can help you build positive momentum towards becoming debt-free. Here’s everything you need to know about the best debt consolidation loans — and how they can make your financial life (and life in general) easier.
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A debt consolidation loan combines multiple debts into one loan with an interest rate that is lower — often significantly lower — than the average interest rate on your debts. Debt consolidation loans allow you to manage your debt more easily. That’s because you make one monthly payment toward the loan, instead of individual payments to all your creditors.
When you take out a debt consolidation loan, you give the lender information on all your debts. The loaner pays off those debts right away. The amount of those debts is the principal on your new loan. You make a fixed monthly payment on that loan, plus interest, for a set period of time (generally 2 to 5 years). The interest rate can vary, but it will typically be lower than the interest rate on your collective debt.
Example: You have $5,000, $7,000, and $4,000 of debt on each of three credit cards, at interest rates of 23%, 16%, and 13% respectively, plus an outstanding auto loan for $8,000 at an interest rate of 11%. Your new consolidation loan has a balance of $24,000, at an interest rate that is lower than the average interest rate of all the individual loans.
If you have debt and are examining ways to consolidate it, a debt consolidation loan is likely going to be one of your most compelling options. While it’s not the best idea for everyone, there are a lot of pros to consider.
While a consolidation loan is a viable option for simplifying debt, it’s important to remember that debt consolidation loans are not a magic potion. There are still some potential downsides.
Yes and no. At first, applying for a debt consolidation often causes your credit score to go down. That’s because of the hard inquiry on your credit report.
But if you make on-time payments on your new loan, that can positively impact your credit score. What’s more, a debt consolidation loan can help you pay off your debts faster, which can significantly lower your credit utilization ratio and potentially improve your credit score over time.
Looking for debt consolidation loans but aren’t sure how to find the right fit. The best way to go about finding the right debt consolidation loan is to compare multiple offers at once. By far, one of the easiest ways to do this is with help fromMoneyLion.
As you compare personalized offers for various consolidation loans, consider the following factors.
To select the best debt consolidation loan, start by assessing interest rates and fees. A favorable interest rate usually ranges from 5% to 15%. The range is wide because it’s influenced by factors such as your credit score, income, and prevailing market rates.
A stronger financial profile often leads to lower interest rates. It’s also important to compare rates from various lenders to secure the most competitive offer. And make sure to compare the rate to the average rate on your credit cards, since a few percentage points lower may have a positive impact.
You’ll also need to take into account loan origination fees (an upfront payment at the beginning of the loan) and any monthly fees or service charges, which can vary widely by loan. Consider these costs alongside the benefits of a debt consolidation loan, to understand if it’s financially worthwhile for your situation.
In a debt consolidation loan, your loan term and monthly payments are determined by factors like the loan amount, interest rate, and repayment period. The loan term is the duration for repaying the loan.
Shorter loan terms may lead to higher monthly payments but lower overall interest costs. Longer terms typically result in lower monthly payments but potentially higher overall interest expenses.
Monthly payments are calculated based on the loan amount, interest rate, and overall term.
Prepayment penalties are charges that lenders impose if you repay the loan ahead of schedule. Some penalties are fixed amounts, and others may be a percentage of the remaining balance or a specific number of months’ interest.
If you anticipate repaying the loan early, look for lenders offering loans with no repayment penalties or negotiate to have them removed from your loan contract.
Start by thumbing through customer reviews and ratings on platforms such as Trustpilot or the Better Business Bureau (BBB). Also, ensure the lender is licensed and accredited, looking for membership in industry associations such as the American Fair Credit Council (AFCC).
Also, research any complaints or regulatory actions against the lender; the Consumer Financial Protection Bureau (CFPB) website can provide insights into lender complaints.
“Will I even qualify?” This is where a lot of the stress lies when it comes to debt consolidation loans. It’s normal to feel a little confused. Here is the real deal on how to qualify, or how to set yourself up to qualify later.
Most lenders have a minimum credit score requirement for borrowers. If yours is too low for now, you can help build your credit score by making timely payments, reducing your credit card balances, and checking your credit report for errors or inaccuracies you can dispute.
It’s also important to avoid increasing your overall debt. These actions can have a positive impact on your credit score over time.
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Your debt-to-income (DTI) ratio helps lenders evaluate your financial health and the likelihood that you’ll repay your debt. It’s calculated by dividing your total monthly debt payments by your gross monthly income and then multiplying by 100 to arrive at a percentage.
Lenders typically prefer DTI ratios below 36%, but levels vary based on your individual circumstances or the lender’s policies.
Lenders will more often than not need to see that you’re in a full-time job with regular paychecks. If you’re self-employed, you’ll likely need to show that you’ve had consistent income for the past several years.
It’s time to make it happen. Here’s how to turn your loan from concept to reality.
Add up the existing balances on your credit cards, auto loans, and other revolving lines of credit that you’d like to consolidate. Having an accurate sum of all your current debts will allow you to apply for the proper loan amount and pay off those balances in full.
When it comes to applying for a debt consolidation loan, you can choose to work with banks, credit unions, or online lenders. Each will have its own application process and requirements, so make sure you follow the instructions carefully and provide everything that’s asked for, such as pay stubs, employment history, personal information, and more.
Use MoneyLion for a simplified, streamlined way to obtain debt consolidation loan offers. Simply input your criteria you’ll get matched with personalized offers for debt consolidation loans you can compare and choose from. There’s no hard credit check, so your credit score won’t have an impact.
Your other option is to apply for consolidation loans from various lenders one by one. Not only can this be time-consuming, but you may also see a dip in your credit score if a lender conducts a hard credit check.
Read through the information on each of your consolidation loan offers and compare them alongside one another to understand where you can get the best deal.
When you get debt consolidation loan offers through MoneyLion, if you qualify, you’ll automatically receive an offer or offers for various loans from trusted lenders. Receiving multiple offers from various lenders makes it easy to compare and choose the offer that is best for you.
Once you receive the debt consolidation loan, you’ll use that lump sum to pay off the balances on all the debts you want to consolidate. Make sure to pay each creditor in full to officially close out those accounts. It may even be a good idea to get in touch with your creditors to confirm the debt has been paid off.
Paying off multiple debts at once with your consolidation loan leaves you with just one new loan payment to manage moving forward.
It’s time to turn all your focus towards paying off your new consolidated loan. Set up automatic payments if possible to ensure you never accidentally miss the due date. And remember to avoid missed or late payments that can damage your credit score or result in added fees.
While they have a wide range of benefits, debt consolidation loans aren’t a necessary part of everyone’s debt management plan. There are other ways to reduce debt, especially if you have a lower debt amount (under $10,000) or are managing debt on one to three credit cards.
Many financial experts recommend having 3-6 months’ worth of living expenses readily available to cover unexpected costs like car repairs, medical bills, or job loss. A savings account is the perfect place to stash this emergency fund, thanks to its accessibility and FDIC insurance that protects your deposits up to $250,000 at Member FDIC institutions.
0% interest balance transfer cards enable you to move existing credit card balances to a new card without accruing interest for a set promotional period, typically ranging from around 6 to 18 months.
A transfer fee of around 3 to 5 percent usually applies, though it could be higher. And if you don’t pay the full amount off by the end of the term, you’ll be left with both the balance and an interest rate — nullifying the benefit of the transfer. But if you pay the amount off by the promotional period, you could reap some savings benefits.
Home equity loans allow homeowners to borrow against the equity in their homes, by leveraging the difference between the home’s current market value and the amount still owed on the mortgage.
Home equity loans are generally provided in a lump sum that is typically repaid over a fixed period, with a fixed interest rate.
Pros of home equity loans include typically lower interest rates than credit cards since they’re secured by your home’s value. However, this financing solution comes with a significant downside. If you fail to repay your home equity loan, you could risk foreclosure on your property.
While a home equity loan offers a lump sum of money upfront, a home equity line of credit (HELOC) is a revolving line of credit that you can draw from over a set time period (often several years). It has a revolving interest rate.
It’s similar to a home equity loan in the sense that you’re borrowing against your property’s value. Which means that if you fail to make payments, you could be at risk of losing your home.
Debt consolidation loans can be an effective way to simplify your financial commitments — and take charge of your financial well-being.
By consolidating your debts into a single payment at potentially lower interest rates, you can follow a clearer path toward financial stability — and getting out from under that debt that may make you feel stressed and uncertain about the future.
They’re not right for everyone, but for many, they function as a key to unlocking positive momentum toward financial freedom. Whether you get one is up to you, but regardless, it’s good to be armed with all the info you need to make a decision you feel good about.
Every individual situation differs, but debt consolidation could be a smart idea for you because it could provide the opportunity to lower your overall interest rate and help you pay off debt faster.
Initially, consolidation loans can hurt your credit score because of the hard inquiry on your credit report. But in many cases, your credit score could increase as you pay down your debts more quickly than you ordinarily would have.
A personal loan is a solid choice for consolidating debt as it typically offers lower interest rates compared to credit cards. It also lets you merge multiple debts into a single, convenient monthly payment.
That depends on your particular situation, but in many cases, consolidating your debt can be a smart idea because it not only can lower your interest rate but can also help you tackle debt pay-down in a more organized, streamlined way.
Yes, in many cases you can still use your credit card after consolidating your debt. However, it’s essential to use your credit card responsibly to avoid falling back into debt.
