A debt consolidation loan is a loan that is used to pay off high-interest credit card bills, credit lines or outstanding medical/emergency bills. Once the new loan is complete, you'll have a new single monthly payment. The loan will cover all principal and interest for the full term of the loan.
Eliminating debt is the first step to financial freedom. If you're struggling to keep up with your current monthly payments or if you're only making the minimum payment on high-interest credit cards or credit lines, a debt consolidation loan may be a solution to reducing your stress and monthly debt load.
Interest Rate on a Debt Consolidation Loan
The purpose of a debt consolidation loan is to lower your interest expense and pool your debt into one loan. The Annual Percentage Rate (APR) interest amount will be relative to your current credit situation. If you are trying to pay off payday loans that are charging 450% to 1400% interest compared to lowering credit card interest charges with 20% to 30% interest fees, will determine what you consider a fair interest rate for a new debt consolidation loan.
To receive a low-interest rate on a debt consolidation loan, you will need a great credit score. If your credit score is closer to 600, you will be paying 25-35% interest. Depending on the circumstances, 25% interest can be a great improvement over payday loans but not worth your while with credit card interest fees near the same amount.
The amount of capital you can borrow unsecured will be determined by your credit score. A quick rule - below 660, the maximum amount you can borrow will be below $50,000. If your credit score is 660+, there are lenders that offer unsecured debt consolidation loans up to $100,000 online. If you have security, the loan amount will depend on the equity in your home or other assets.
Debt Consolidation is Not for Everyone
Debt consolidation can also be a poor choice if you are not ready to for financially responsible. If you, your partner or both of you are undisciplined with your spending choices, debt consolidation could drive you into a worse financial position.
Is Your Credit Score Stopping You From Getting a Loan?
If you are not in the position to qualify for a debt consolidation loan today, America loan Service is offering a Credit Score management program that will help you get reorganized. If your unsure of what makes up your credit score, this information will be helpful to break down the key elements of your credit score.
After receiving the debt consolidation loan, the existing credit cards will be free and clear of debt. All of the old debt is under one payment that is now "paying off" your debt instead of only covering the minimum credit card payments. If you are undisciplined and start running up your credit cards again, it could be very difficult for you to get out of debt again. Your ability to pay off even more debt could be hard with this new monthly debt consolidation loan payment as you may not qualify for additional financing. If you are considering debt consolidation, make sure you are prepared to stick with the plan.
Steps to Success with Debt Consolidation
Start Tracking Your Spending
The first step to climbing out of debt is to stop the monthly burn. Track your spending and identify areas where you can save money.
Total Debt Breakdown
Calculate your current debt without your mortgage and the future interest assigned to your debt. Take a close look at your debt to income to make sure you can afford the payments. This link explains debt to income and provides a debt to income calculator.
Check your loan documents to see if there are any payout penalties on your existing loans.
Shop for a low-interest Loan
Shop around to see who offers the lowest interest rate with flexible repayment options. The main savings with debt consolidation is the interest expense.
Pay off High-Interest Loans
Once every credit card is paid off, consider canceling most of them, especially if it has a monthly or annual fee.
Going credit card-less may not be realistic, so if you plan to keep a credit card, keep your oldest credit card, it will help with your credit history and improve your credit score.
Your goal going forward should be to pay off your credit card balance in full every month.
Dedicate Part of Your Budget to Early Loan Repayment
Sign up pre-authorized payments and align your payments with your paycheques. With some lenders, you will receive a lower interest rate by setting up pre-authorized payments.
Set up your loan payments to twice a month and get a few extra payments in every year. It will save on interest and pay the debt consolidation loan off even faster.
What Interest Rate Will I pay?
The interest rate offered by the lender will depend on your credit score and credit history at the time you apply.
Once the loan is approved and locked in, the interest rate will remain constant for the life of the loan.
Will Applying Harm My Credit Score?
Most lenders complete a soft pull on your credit score. Lenders would usually complete a hard pull if they have approved the loan and informed that they need the hard pull. Make sure to always ask.
What is an Annualized Percentage Rate (APR)
Debt consolidation loan providers charge you interest and fees for their services and these fees are blended into the Annualized Percentage Rate (APR). Lenders break down the fees that are being charged on the loan. The fees could include closing, insurance costs, and origination fees. Read the fine print to find the lender fees. Some lenders waive these fees. The origination fees range from 0 to 6% depending on which lender you're looking at. Closing and insurance costs can be also be added to the loan amount.
Secured Debt Consolidation Loan Options
Taking out an unsecured debt consolidation loan is not your only method to consolidate your debt. Unsecured debt consolidation loans are considered a higher risk for lenders than a secured loan and usually, come with a higher rate of interest. If you're in a position to use the equity from your home or other assets, you may receive a better interest rate with a secured loan. Here are a couple of service providers if you are using your home or auto for security.
Credit Card Options
Another debt consolidation option is applying for a 0% credit card to clear off high-interest debt. This can be a short-term solution until the interest charges on the credit card resume. The advantage of taking out a debt consolidation loan is that the principal is eventually paid off. If you cannot qualify for the full amount of your current debt, a 0% credit card can also be part of your solution. While you're paying 0% interest, try making larger payments when it all goes against the principal.
21 Month Interest-Free Balance Transfer 0% Credit Card
The Citi® Diamond Preferred® Card is available for good and excellent credit. This credit card option provides an excellent way to reduce interest expense and pay off the debt. If you still have debt remaining after 21 months, apply for a debt consolidation personal loan.
18 Month Interest-Free Balance Transfer 0% Credit Card
If you have fair credit and considering debt consolidation, an 18 month 0% balance transfer credit card is an excellent way to clear high-interest expense instead of taking out a personal loan and paying interest now. You will also receive 0% interest for 6 months on purchases.
When your mortgage comes up for renewal, it can be a great time to clean up debt. If you've had your property for a while and built some equity, this will provide the lowest interest costs for the short term.
If the new debt adds years to your mortgage, do a comparison between a debt consolidation home equity loan and the mortgage interest. If you can manage a home equity loan instead of adding to your mortgage payment, we recommend that you do that instead of extending the time for this debt.
I was in a position of having a credit line and only making the minimum payment. Five years later, I was still only covering the interest expanse every month. In the end, I added the credit line to our mortgage when it came up for renewal. Looking back on this, I should have taken out a debt consolidation loan and dealt with the principal or converted my credit line to a loan years ago. The interest accumulated and we paid way more than we needed too. If you are disciplined, a line of credit will not be an issue.
Home Equity Line of Credit
A Home Equity Line Of Credit is referred to as a HELOC by most lenders. It is a credit line secured by your property. The lender places a lien against your property and when you sell the credit line is paid off.
Home Equity Loan
A home equity loan is simply a loan with a set term like a personal loan or debt consolidation loan. The home equity loan is secured by your property or assets and we consider this the best option for debt consolidation if you can qualify. Why? It should be your lowest interest offer and it will have a shorter term with an end date. If you use a credit line, it never ends and adding to your mortgage may spread your debt over 20-30 years. This will cost you 3-5 times in interest by the end of the mortgage.
Depending on your age, a mortgage reversal may work if you are close to retirement and you need to clear off high-interest debt. As we get closer to retirement age, we try not to take on long-term debt. Take the hit and get rid of the debt.
Small Business Debt Consolidation Loan
Small business loans can be a great option if you have a credit score from 500+ and have been in business for one year.
LendingClub is a peer to peer lender offering easy, fast and affordable business loans without restrictive bank requirements. Lending Club is one of the largest online providers with over $20 billion in funds issued.
Unsecured Debt Consolidation Search Recommendations
Your credit score and credit history will determine the interest rate and perks available to you. For example, SoFi does not charge origination or late fees. If you are only offered high-interest loans because of your credit score or history, you may need to repair your credit first or apply for a secured debt consolidation loan.
Debt Consolidation Loan Offers
A personal loan from SoFi could help save thousands. With low-interest rates and a fixed monthly payment, you can pay off credit cards, fund home improvements, or make a major purchase.
Members get a 0.125% rate discount on an additional SoFi loan—just for being a member.
Financial Advisors – Members get complimentary guidance from licensed financial advisors. We also waive our fees to invest with SoFi Wealth for members.
- Loan Amounts: $5,000 to $100,000
- Credit Score: Starting at 660+
- APR: See SoFi review for up to date APR information
- Terms: 3,4,5,6, or 7 years
- Fees: No application fees, no origination fees, and no prepayment penalties
- Added Benefits of SoFi
- Will consider borrowers with limited credit history with great cash flow
- Unemployment protection: If you lose your job, SoFi will temporarily pause your payments and help you find a new job (unique to SoFi. Check out their disclaimer on the SoFi website for full details) If approved for the program, SoFi will put their loans into forbearance, suspending their monthly SoFi loan payments.
- SoFi Personal Loans are not available to residents of MS and NV. Maximum interest rate on loans for residents of AK, OK, TX and WY is 9.99% APR, for residents of ME is 12.24% APR and for residents of CO, CT, HI, KS, SC, VA is 11.99% APR. Personal loans not available to residents of Michigan who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, IL, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Variable rates not available to residents of AK, IL, OK, TX, WY
We have listed our a span shot of debt consolidation loan providers by credit score and interest rate.
The America Loan Service online request form connects consumers to hundreds of personal loan lenders at one time with rates starting at 5.99%. The service is designed to connect consumers based on lender credit criteria.
The process is very simple:
- Fill out the short form, it is safe and secure
- See if you are approved in real time from a large network of lenders
- Check your bank account to see if the money arrived as early as the next business day if you are approved
- Loan Amounts: $1000 to $35,000
- Credit Score: 580+
- APR: See ALS Detailed Review for up to date APR information
- Terms: 3 to 36 months
- Fees: Vary by the lender
The lenders will review your request quickly to determine whether your information meets the lender's loan qualification criteria. You will receive notice within a few minutes if there is a lender interested in discussing a loan. Loans are normally funded within 1-5 business days depending on the lender and if they have all information required to fund.
If a lender is satisfied with all of the information with your request and has decided to offer you a loan, you will be directed to the lender's website. At this point, you will leave America Loan Service and we recommend that you review the terms and conditions of the lender. Take your time to go through all of the information from the loan provider. We recommend that you ask every question to be sure you fully understand the loan. The lender should explain the following information:
- Loan amount offered
- Finance charge and fees
- Annual percentage rate (APR)
- Loan term
- Payment schedule
Upgrade was started by two of the founding member of Lending Club, a pioneer in marketplace lending. They were part of facilitating $33 billion in loans and made credit available to over 2 million America families over the last decade.
Through Upgrade, consumers can access affordable personal loans from $1,000 to $50,000 with low fixed rates that never change. Personal Loans may be used to pay off high-interest credit cards, make home improvements, make a major purchase and much more!
- Loan Amounts: $1,000 to $50,000
- Credit Score: 620+
- APR: See Upgrade Detailed Review for up to date APR information
- Terms: 36 to 60 months
- Fees: 1% to 6% Origination Fee and will vary by loan term
- Debt to income of 50%
- Funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications
Upgrade is introducing an unsecured credit line up to $50,000. Go online to Upgrade and join their waitlist.
- Loan Amounts: $5000 to $35,000
- Credit Score: 660+
- APR: See Payoff Detailed Review for up to date APR information
- Terms: 2 to 5 years
- Fees: No fees for origination, prepayment, or loan disbursement
- Added Benifits of Payoff
- Payoff is a team of financial services professionals, research and clinical psychologists, data scientists, neuroscientists, Member Advocates and technology experts working together to better understand and accelerate people’s journey toward financial wellness.
- Soft Pull only to start
- Specialize in consolidating credit card debt
- Loan Amounts: $10,000 to $35,000
- Credit Score: 600+ Rates decrease with a qualified Co-signer or a retirement fund with a minimum of $40,000
- APR: See freedomplus Detailed Review for up to date APR information
- Terms: 2 to 5 years
- Fees: Origination fees range from 0 to 5%
- Added Benifits of Freedomplus
- Offering co-signer loans
- Minimum income of $30,000 to apply
- Soft Pull only to start
- Debt to income of 40%
- Loan Amounts: $1000 to $50,000
- Credit Score: 640+
- APR: See Credible Detailed Review for up to date APR information
- Terms: 2 to 5 years
- Fees: Fees will vary by lender
- Added Benefits of Credible
- Apply once to Lending Club, Prosper, Avant, Upstart, FreedomPlus, Payoff, Best Egg
- Soft Pull only to start
If you are unable to keep up your payments with your loan providers and are struggling with the pressure, debt settlement may be an option. Debt settlement is also referred to as debt negotiation, negotiated debt settlement or even referred to as debt consolidation.
Debt settlement companies will ask you to deposit money into a cash account every month. Once you have reached the level to pay off one or more of your debts, they will attempt to negotiate a buyout with each one of your lenders. This is a good choice if you have more debt than you can manage over a 2-3 year time period or if you are experiencing financial difficulties that have put your behind on your payments or is about too.
Drowning In Debt? Consolidate Your Debts And Save Thousands
Why would a lender consider debt settlement instead of just charging you more late fees and penalties? Lenders want to get paid and if you are close to bankruptcy, they would rather get some of their money back instead of nothing at all. They are usually willing to settle for a lower amount given that there is already an extreme hardship for the debt holder.
Is Debt Settlement right for you?
Debt settlement is not for everyone. You would only look at this if you had legitimate financial hardship which has made you fall behind with all of your creditors. Debt settlement providers are experts in this field and would not work with anyone that was trying to deceive or defraud lenders.
This process can take a long time and can affect your credit score and may even cause tax issues. You would look at this option if you are out of options for debt consolidation. Check this connection for the best option for debt settlement.
Secured debt consolidation loan should always cost you less in interest payments, but you could lose your asset if you default. Unsecured debt consolidation loans have a higher interest rate, but you will not lose your property if you are unable to pay. You will severely damage your credit score if you default on an unsecured loan.
Take advantage of 0% credit cards as a quick way to stop the interest payments. You may want to do this step first to stop the bleeding now.
Take a close look at your personal spending habits and if you are out of control contact a credit counselor.
Debt consolidation is an excellent way to get rid of your credit card interest and start paying down all of your debt instead of only making the minimum monthly payments.
- USA.gov site: Dealing with Debt - USA.gov site: Dealing with Debt
- Debt consolidation definition CFPB acquired May 10, 2018 - "Consolidation means that your various debts"
- Length of credit history is 15% of your credit score - "Length of credit history (15%)" of your credit score: myFico acquired may 5, 2018
- The National Foundation for Credit Counselling - The National Foundation for Credit Counselling
- Payday Loan Consumer Information” CFA. Acquired May 5, 2018 - Alabama “Payday Loan Consumer Information