If you have more debt than you can handle, you may be thinking of getting a debt consolidation loan to ease your financial burden. What is the best way to go about it? How do you even go about getting a debt consolidation loan? This article provides an in-depth look into how to apply for a debt consolidation loan and the different options available.
Carrying a balance on credit cards is on the rise. It is estimated that 133 million consumers have at least one credit card balance that they do not pay in full every month (source). The American Bankers Association reports that 42% of all credit card users carry a revolving balance every month.
Credit card balances and other unsecured debt like medical bills, unsecured personal loans, and payday loans can mount up. You may find yourself paying multiple creditors every month and struggling to pay high-interest fees in the process.
What is debt consolidation?
Debt consolidation is a process by which you combine the balances of unsecured debts into one loan. If you can consolidate all your bills with a debt consolidation loan, you will only need to pay one bill rather than paying multiple creditors.
In addition to the convenience of just one bill to pay, debt consolidation loans typically offer a lower interest rate than you may be paying now. Depending on the amount of your loan, you can potentially save thousands of dollars over the life of the loan because of the lower interest rates offered.
The purpose of getting a debt consolidation loan is to simplify your payments every month and save money on interest. A debt consolidation loan does not eliminate any portion of the principal debt you owe, but it can make your financial life a little easier to manage.
To make debt consolidation work, you must be committed to repaying your debt consolidation loan and changing the way that you use unsecured credit. A potential danger of debt consolidation is that you may be tempted to obtain new credit cards or continue spending on current credit cards. By doing this, you may end up in a deeper financial hole than the one you are in now.
What are the pros and cons of a debt consolidation loan?
Debt consolidation loans can help you in several ways but may also dig you in a deeper hole if you’re not careful. Here’s a closer look at the pros and cons.
Here is a list of the benefits and the drawbacks to consider.
- Typically lowers monthly payments.
- Can reduce the cost of your debt.
- Simplify your budget.
- May encourage overspending.
- Lengthening the term of the loan could increase the cost of the loan.
- Loan requirements typically exclude borrowers with poor or fair credit.
Consolidating your debt can help you to lower your monthly payment amount, reduce the overall cost of the debt, and simplify your budget. Note, a debt consolidation loan does not eliminate any portion of the principal debt you owe but can reduce the amount you pay in interest.
To make debt consolidation work, you must be committed to repaying your debt consolidation loan and changing the way that you use unsecured credit. A potential danger of debt consolidation is that you may be tempted to obtain new credit cards or continue spending on current ones. By doing this, you may end up in a deeper financial hole than the one you are in now. As the Consumer Finance Protection Bureau warns, debt consolidation is one way to address debt, but it doesn’t erase your debts. Additionally, strict qualification requirements can exclude some people who would otherwise benefit from a debt consolidation loan.
What are the requirements to qualify for a debt consolidation loan?
Different lenders have different requirements for debt consolidation loans. However, there are a few factors that almost all lenders will consider when determining whether you qualify for a debt consolidation loan. These are:
While you don’t need perfect credit to be eligible for a personal loan, most companies do require a good to excellent credit score. Lenders use your credit score to assess risk; your credit score is also a factor when determining the interest rate you’re offered.
Proof of income
Lenders want to see that you have a steady income and a stable employment history. You might need to submit pay stubs or recent tax returns.
Other signals of financial stability include living in the same place for a long time, and your debt-to-income (DTI) ratio. If your total monthly debt payments are more than 36% of your gross income, you might have a difficult time borrowing money.
Some lenders may ask for security before approving your application. If you’re a credit risk, the lender wants to be sure that they’ll get their money back. You may be asked to sign over collateral in the form of a home, property, or vehicle.
This does not mean that you cannot get a debt consolidation loan without collateral. However, unsecured debt consolidation loans have higher interest rates. Such unsecured loans may also be for much smaller amounts. This makes it more likely that your debt consolidation plans may fail.
How to apply for a debt consolidation loan
If you think a debt consolidation loan could be the right solution for your situation, find out what terms and rates you can get. Many lenders offer debt consolidation loans, both secured and unsecured, here’s how to apply and qualify for a debt consolidation loan.
Apply for unsecured debt consolidation loans
The application process for a debt consolidation loan is simple. Once you’ve found a lender that meets your criteria, complete an online loan application.
SuperMoney makes it easy with this debt consolidation loan offer engine. Fill in one short form and receive competing for loan offers from leading lenders. There is no hard credit pull for checking your rate.
Apply for secured debt consolidation loans
If you have equity and would like to use it, look into home equity loans and lines of credit. The application process will be more involved in this loan product because your home will need to be assessed. However, it’s still important to shop around and get at least three quotes before deciding on a lender.
What are the risks of secured debt consolidation loans?
Putting up your home or other collateral to obtain a debt consolidation loan can help you get a lower interest rate. However, it is essential to remember that if you fail to make payments on your debt consolidation loan, you could lose your house or other collateral.
Unless you are sure you can afford the payments, agreeing to put your home up as collateral is not a good idea. In this case, it is best to find other debt-relief options.
Apply for a shared equity agreement
If you are a homeowner (or if you’re about to buy a house), you may want to consider applying for a shared equity agreement with companies like Unison or Hometap. A shared equity agreement is a financial agreement that allows another party to invest in your property and acquire a stake in its future equity.
You won’t have to make any monthly payments on the amount, nor pay any interest. When the term is up, whether triggered by a set number of years or the sale of the home, you repay your investor. How much you pay depends on whether your property’s value went up or down.
How to compare debt consolidation loans
When comparing debt consolidation loans, here are the key factors you’ll want to pay attention to:
- Fees: Take note of any fees involved with the loan. These can include origination and prepayment fee, closing costs, and more.
- Interest rates: Compare the interest rate on the loan. Look for the lowest rate available as it will lower the amount you pay per month and over the life of the loan.
- Terms: The term is the amount of time you have to pay back the loan. It can range from one year to five, or more. Longer terms lower your monthly payment amount but increase the total cost of the loan. Find the right loan term for your needs.
- Loan amounts: Different lenders will approve you for varying amounts, depending on their qualification standards. Compare offers to find the best fit for your debt consolidation situation.
- Lender reputation: Lenders will vary in reputation, experience, and credibility. Compare their reviews and ratings to ensure they are trustworthy and fair in their business dealings.
You’ll want to shop around, get quotes, and look for the best deal per month and overall from a company with a good reputation.
How can you get a debt consolidation loan without putting up collateral?
There are a few ways that you may be able to get a debt consolidation loan without putting up collateral. For instance, suppose you owe less than $5,000. You might consider applying for a new credit card with an introductory 0% APR for 12 months or so. Doing so can be a good strategy if you have the self-discipline to avoid new purchases on the card.
If you owe more than $5,000, or you prefer not to add another card to your wallet, you can apply for a personal loan from a credit union or an online lender. Check out our unbiased reviews of personal loans here.
Before applying for a personal loan for debt consolidation, consider the pros and cons of doing so. Unsecured personal loans may carry a higher interest rate than secured loans. Make sure the debt consolidation loan is worth your time. Crunch the numbers to see if a personal loan will help you get out of debt faster than simply trying to pay your bills as you are doing now.
If your credit is good to excellent, you may have several lenders from which to choose. As in all financial matters, it is good to consider your options carefully before committing to a course of action.
How can you get a debt consolidation loan with poor credit?
Many lenders advertise loans for people with poor credit. However, buyers beware. Many of these online advertisements are scams.
Does that mean that you cannot get a loan with poor credit? No, it doesn’t. It does mean, however, that you may have to pay a substantially higher interest rate than those with better credit have to pay.
If you have a relationship with a local bank or credit union, that may be an excellent place to start your loan search. Additionally, you may be able to obtain a loan by adding a co-signer with good credit.
What can you do when you don’t qualify for a debt consolidation loan?
No matter how badly you might need one, sometimes you simply cannot qualify for a debt consolidation loan. If that happens, do not worry. There are still other debt relief options available to you.If you don’t qualify for debt consolidation and can’t pay your current debts, you may want to consider the following options:
Adjust your budget
Analyze your budget to see if there is any way you can make adjustments to meet your financial obligations. Can you cut spending somewhere? Pick up a side job to boost income? Reschedule your monthly payments, so they are more manageable?
Debt management plan
A debt management plan (DMP) is another option to consider. It is a consolidation-type program facilitated by the National Foundation for Credit Counseling (NFCC), a nonprofit financial counseling organization with agencies around the country.
It involves enrolling your debts in the program and paying the agent one monthly payment to cover the bills. The agent then pays your creditors on your behalf and typically negotiates down the interest rate. DMPs usually last from three to five years and come with a fee for the service.
If you can’t afford to pay your debts as they are, your next best option may be a debt settlement program. These involve you working with an agency to settle your existing debts for less than you owe. You stop making payments to your creditor and instead put money into a savings account with the agency. When the account balance is high enough, the agency will contact your creditors and attempt to settle your debts for a lump sum.
Debt settlement cases usually result in derogatory marks on your credit score, which remain for up to seven years. The service also comes with a fee and no guarantees. The potential benefit is settling your debts for less than the total amount due. However, the pros and cons should be considered alongside bankruptcy.
If you are financially buried with no hope of paying or negotiating your way out, bankruptcy may offer the relief you need. While it will remain on your credit report for 10 years, it can provide a fresh start, which allows you to begin rebuilding a path to financial health. It’s best to speak with a bankruptcy attorney first if you are considering this option.
While being in debt can be very stressful, remember that you have options no matter how bad the situation may be.
When does debt settlement make sense?
When debt consolidation is not a viable option, debt settlement may be the right solution for your financial dilemma. Unlike debt consolidation, in which the goal is to pay off the full amount you owe to creditors, debt settlement focuses on reducing the principal balance owed. Debt experts do this by persuading your creditors to accept a lesser amount than you owe.
Debt settlement companies negotiate with your lenders on your behalf. Because they have experience and relationships with major creditors, specifically credit card companies, their success rate is higher. Sometimes, their negotiations may result in a significant reduction of as much as 30% to 50% of the amount you owe to your creditors.
Debt settlement is a good option for those who are unable to find other reasonable means to handle their debt load. It is also a smart option for those who wish to avoid filing for bankruptcy. While debt settlement does affect your credit score negatively, it is also a way to relieve your financial burden in a relatively short amount of time. For many consumers, being debt-free within two to five years outweighs any temporary negative effect on their credit scores.
If you are in a bad spot financially, it is wise to examine all your available options, including debt settlement. To discuss the options available for your particular financial situation, get a free debt settlement consultation today.
When is debt consolidation a bad idea?
If your credit and financial situation are less-than-great, you may not be able to qualify for a personal loan at all or one that makes financial sense. If the APR of your debt consolidation loan is higher on average than the interest rates of your outstanding debts, consolidation is a bad idea.
Even though the payments will be more streamlined, they’ll cost you more in the long run. In this case, it’s better to improve your credit through responsible repayment behavior, continue with your current payments, and try again later.
Find your path to a better financial future
Starting on the road to a better financial future is just a few decisions away. Debt consolidation loans are often a helpful financial product to streamline debt repayment. However, if they are not an option for you, you can choose from the many alternatives shared above.
Not sure where to start? You can quickly find out if you qualify for a debt consolidation loan with SuperMoney’s personal loan engine. It’s fast, and prequalifying for loans won’t hurt your credit score!
There are various ways to get out from under stressful debt and regain your financial freedom. Debt consolidation is a good option because it makes it possible to merge your debts under a single, more manageable loan. A careful comparison of lenders will help you find the right personal loan to consolidate your debts. Get the information you need – read reviews of online personal loan lenders here.