A Complete Beginners Guide to Finding the Best Debt Consolidation Loans

Filed in Loan by on November 13, 2020 0 Comments

This page provides detailed information on finding the best debt consolidation loans. Here you will learn what debt consolidation is, the different types of debt consolidations, where to consolidate debts, how to choose the best debt consolidations, best debt consolidations, debt consolidation eligibility and requirements and all other important debt consolidation information you may need. Please stay tuned.

What Is Debt Consolidation?

The term debt consolidation refers to the act of obtaining a new loan to pay off liabilities and other consumer debts, generally unsecured ones. Multiple debts are combined into one larger portion of debt, usually with more favorable payoff terms. Favorable payoff terms include a lower interest rate, a lower monthly payment, or both. Consumers can use debt consolidation as a tool to deal with student loan debt, credit card debt, and other liabilities.

How Debt Consolidation Works?

As earlier said, debt consolidation involves taking out a new loan to pay off other debts and liabilities. So when a consumer is struggling with different types of debt, they can apply for a loan to consolidate those debts into one liability and pay them off. Payments are then made on the new debt until it is fully repaid.

Most consumers apply for a debt consolidation loan through their bank, credit union, or Credit Card Company. This is a great place to start, especially if you have a great relationship and a good payment history with your institution. If you are refused, try exploring private mortgage companies or lenders.

Creditors are willing to do this for several reasons. Debt consolidation maximizes the likelihood of collecting from a debtor. These loans are usually offered by financial institutions such as banks and credit unions, but there are other specialized debt consolidation service companies that provide these services to the general public.

An important point to note is that debt consolidation loans do not erase the original debt. Instead, they simply transfer a consumer’s loans to a different lender or type of loan. For actual debt relief or for those who don’t qualify for loans, it may be best to look into a debt settlement rather than, or in conjunction with, a debt consolidation loan.

Debt settlement aims to reduce a consumer’s obligations rather than the number of creditors. Consumers work with debt-relief organizations or credit counseling services. These organizations do not make actual loans but try to renegotiate the borrower’s current debts with creditors.

Types of Debt Consolidation?

There are two main types of debt consolidation loans: secured and unsecured loans. Secured loans are backed by one of the assets of the borrower, such as a house or car. The asset, in turn, serves as collateral for the loan.

Unsecured loans, on the other hand, are not backed by assets and can be more difficult to obtain. They also tend to have higher interest rates and lower qualifying amounts. With either type of loan, interest rates are still typically lower than the rates charged on credit cards. And in most cases, the rates are fixed, so they do not vary over the repayment period.

There are several ways to consolidate your debts by combining them into one payment. Here are some of the most common.

Debt Consolidation Loans

Many creditors (traditional banks and peer-to-peer lenders) offer debt consolidation loans as part of a payment plan to borrowers who have difficulty managing the number or size of their outstanding debts. These are designed specifically for consumers who want to pay down multiple, high-interest debt.

Credit Cards

Another method is to consolidate all your credit card payments into a new credit card. This new card can be a good idea if it charges little or no interest for a set period of time. You may also use an existing credit card’s balance transfer feature especially if it offers a special promotion on the transaction.

HELOCs

Home equity loans or home equity lines of credit (HELOC) are another form of consolidation. Usually, the interest for this type of loan is deductible for taxpayers who itemize their deductions.

Student Loan Programs

The federal government also offers several consolidation options for individuals with student loans. The federal government offers direct consolidation loans through the Federal Direct Loan Program. The new interest rate is the weighted average rate of previous loans. However, private loans are not suitable for this program.

Benefits of Debt Consolidation Loans

Debt consolidation is a great tool for people who have multiple debts with high interest rates or monthly payments. By negotiating one of these loans, you can benefit from a single monthly payment rather than juggling multiple payments, let alone a lower interest rate.

And as long as there is no additional debt incurred, you can also expect to be debt free sooner. Going through the debt consolidation process can reduce calls or letters from collection agencies, provided the new loan is kept up to date.

A consolidation loan may also help your credit score down the road. Paying off the loan’s principal portion sooner can keep interest payments low, which means less money out of your pocket. This, in turn, can help boost your credit score, making you more attractive to future creditors.

You may also get a tax break, too. The Internal Revenue Service (IRS) does not allow you to deduct interest on any unsecured debt consolidation loans. But if your consolidation loan is secured with an asset, you may qualify for a tax deduction. Debt consolidation loan interest payments are often tax-deductible when home equity is involved.

Requirements for Debt Consolidation

Borrowers must have the necessary income and creditworthiness, especially if you are going to apply to a new lender. While the type of paperwork you’ll need will often depend on your credit history, the most common information includes a letter of employment, two-month statements for each credit card or loan you wish to pay off, and letters from lenders or payment agencies.

Once you have your debt consolidation mechanism in place, you need to ask yourself who you will pay off first. In many cases, this can be decided by your lender, who can choose the order in which creditors are paid. Otherwise, pay off your debt at the highest interest rate first. However, if you have a lower interest rate loan that causes you more emotional and mental stress than higher interest rate loans (a personal loan that has strained family relationships), you may want to -be starting with that one.

Debt Consolidation Loan Application Process

Applying for a Consolidation Loan can be daunting, don’t worry. We’ll walk you through what to expect when applying for a Debt Consolidation Loan so you can complete the application process with confidence. Here’s how to get a debt consolidation loan in five steps.

1. Check Your Credit Score

Start by checking your credit score. A bad credit score (300 to 629 on the FICO scale) might not disqualify you for all loans, but consumers with good to excellent credit scores (690 to 850 FICO) are more likely to win approval and get a low interest rate.

Ideally, the new debt consolidation loan has a lower rate than the combined interest rate on your other debts. A lower rate reduces the overall cost of your debt and shortens the repayment period. If you don’t need the loan immediately, take some time to build your credit to qualify for a lower-rate loan. Here’s how:

Catch up on late payments. Late payments are reported to credit bureaus at 30 days past due, which can drop your credit score by 100 points or more. If you’re within the 30-day window for a debt payment, there’s still time to submit it.

Check for credit report errors. Errors on your credit report, like payments applied to the wrong debts or accounts incorrectly marked closed, could be hurting your score. Check your credit reports for free at AnnualCreditReport.com and dispute any mistakes you find.

Repay small debts. Debts owed account for 30% of your credit score. If you can, pay down any high-interest credit cards before you consolidate. This will improve your debt-to-income ratio, which can help you get a lower rate on the consolidation loan.

2. List Your Debts and Payments

Make a list of the debts you want to consolidate, credit cards, store credit cards, payday loans and other high interest debts and add up the total amount due. You’ll want your debt consolidation loan amount to cover the sum of these debts.

Add up the amount you pay each month toward your debts, and check your budget for any spending adjustments needed to continue debt repayments. The new loan should have a lower rate and a monthly payment that fits within your budget. Commit to a repayment plan with your budget in mind.

3. Compare Loan Options

Shop around to find the one that best fits you. Online lenders, credit unions and banks all provide personal loans for debt consolidation. Online lenders cater to borrowers with all ranges of credit, although loans can be costly for those with bad credit. Most online lenders let you pre-qualify so you can compare personalized rates and terms with no impact to your credit score.

Bank loans work best for those with good credit, and customers with an existing banking relationship may qualify for a rate discount. Credit unions are not-for-profit organizations that may offer lower rates to borrowers with bad credit. You must become a member to apply for a loan, and many credit union loans require a hard pull with your application, which can temporarily hurt your credit score.

Look for lenders that offer direct payment to creditors, which simplifies the consolidation process. After the loan closes, the lender sends your loan proceeds to your creditors at no extra cost. Consider other features that some lenders offer, like having payments reported to all three major credit bureaus, flexible payment options and financial education.

4. Apply for a Loan

When you’re ready to apply for the loan, gather documents such as proof of identity, proof of address and income verification. Take the time to read the loan document’s fine print. Any extra fees, prepayment penalties and whether the lender reports payments to the credit bureaus can affect your credit score as well as the total cost of the loan. If you don’t meet the lender’s requirements, consider adding a co-signer with good credit to your application. This can help you get a loan that you wouldn’t qualify for on your own.

5. Close the Loan and Make Payments

Now that you have found and received approval for your desired loan, there is one important step left. If the lender offers a direct payment, he distributes your loan funds to your lenders, paying off your old debts. Check your bills for zero balance or call each lender to make sure the bills are paid.

If the lender doesn’t pay your creditors, then you’ll repay each debt with the money that’s deposited to your bank account. Do this right away to avoid additional interest on your old debts and to eliminate the temptation to spend the loan money on something else. Finally, within about 30 days of receiving the debt consolidation loan, make your first payment.

How to Pick the Right Lender for your Debt Consolidation?

Choosing the right lender for debt consolidation can be an important decision. The lender you choose should help you feel comfortable and knowledgeable about the debt consolidation loan process. You should look for a lender who will tell you in advance about the entire process of obtaining a loan, especially the requirements for obtaining a loan.

Look for a lender who explains the basics of getting a debt consolidation (or other loan product). Clarity and visibility are necessary requirements for any financial partner. You should receive documentation on the requirements, rates and costs associated with your loan.

“Consumers can choose the best personal loan by doing their research, shopping around between multiple lenders, reading the fine print and only selecting a loan that they know they can afford to repay,” says Jared Kaplan, CEO of OppLoans, an online lender for bad credit loans.

Average Debt Consolidation Loan Rates

A debt consolidation loan is a type of personal loan. Interest rates on personal loans commonly range from around 6 percent to 36 percent. In general, a higher credit score will help you qualify for a lower interest rate. However, keep in mind that lenders may consider other factors when you apply for a consolidation loan, such as your income, existing debt obligations and more.

Best Debt Consolidation Loan Rates

There are hundreds, if not thousands, of Debt Consolidation Loans. We researched and reviewed dozens of them before selecting the best competitors. We reviewed these specific lenders to obtain the best Debt Consolidation Loan rates based on lowest interest rate, loan amount that meets consumer needs, affordable and workable repayment term, low to no fees, and industry reputation for customer service.

LENDEREST. APRLOAN TERMLOAN AMOUNTBEST FOR
Best Egg5.99%–29.99%3–5 years$2,000–$35,000High-income earners with good credit
Payoff5.99%–24.99%2–5 years$5,000–$40,000Consolidating credit card debt with below-average credit
LightStream5.95%–19.99% (with autopay)2–7 years$5,000–$100,000High-dollar loans and longer repayment terms
PenFed6.49%–17.99%1–5 years$600–$20,000Smaller loans with a credit union
OneMain Financial18.00%–35.99%2–5 years$1,500–$20,000Fair to poor credit
Discover6.99%–24.99%3–7 years$2,500–$35,000Good credit and next-day funding
Upstart7.98%–35.99%3–5 years$1,000–$50,000Consumers with little credit history
Marcus by Goldman Sachs6.99%–19.99%3–6 years$3,500–$40,000Consolidating large debts

Frequently Asked Questions about Debt Consolidation Loans

Will a Debt Consolidation Loan Hurt My Credit Score?

Applying for a debt consolidation loan may temporarily hurt your credit score, since the lender will have to do a hard credit check in order to approve you. However, if you keep up with your monthly loan payments, you should see significant improvements in your score. Just ensure that you make on-time payments on your loan; missing payments could damage your credit.

What Types of Debt Can I Consolidate?

The most popular type of debt to consolidate is credit card debt, since it typically has some of the highest interest rates. However, you can also consolidate other types of debt, such as personal loans, payday loans and medical bills.

How Much Can I Save with a Debt Consolidation Loan?

If you have double-digit interest rates on your credit cards and can qualify for a personal loan under 10 percent APR, you have the potential to save hundreds of dollars in interest on your debt.

We hope you will find this information useful. Do you have any queries on finding the Best Debt Consolidation Loans? Please feel free to let us know so we can assist you with any information you will need.

Please, do not hesitate to share it with friends, colleagues and relatives whom you know may be in need of this kind of information. Thanks for caring and do have a nice one ahead!

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