If your bills are piling up and you find yourself struggling to catch up on your monthly payments, you may consider getting a personal loan for debt consolidation. This type of loan is designed to help borrowers pay off multiple high-interest debts by combining them into one lump sum that you can pay back over time, often at a lower rate. Let’s take a closer look at what a personal loan for debt consolidation is and what you need to qualify.
What You Need to Know About Debt Consolidation Loans
A personal loan for debt consolidation is, essentially, a refinance loan that extends the length of time for repayment for your existing obligations. It lets you combine multiple debts into a new, separate loan that consolidates all of your outstanding balances in one monthly payment. Debt consolidation is appealing to many not only because it simplifies your monthly payment process, but it often comes with lower interest rates. If you’d like to learn more about the debt consolidation process, check out our step-by-step guide.
Debt consolidation can be used to tackle both secured and unsecured debt. Credit cards, payday loans, medical bills, and personal loans are all examples of unsecured debt. A HELOC, or Home Equity Line of Credit, is a type of secured debt, with your home or property serving as collateral.
Be aware that because debt consolidation extends your repayment terms, you may be in debt longer under that one new loan. Whatever your financial situation is, weigh the pros and cons of paying a little less over a longer period of time with a debt consolidation loan.
Getting a Personal Loan for Debt Consolidation
To get a personal loan for debt consolidation, you need to start by applying with a traditional or online lender, who will review your creditworthiness to determine whether you qualify for the loan. If you do qualify, the lender will set your monthly interest rate, which is typically based on your credit score.
If your FICO score is 670 or higher, you’re in the good-to-excellent range, which means you’ll likely be approved at a lower rate. If your credit score is 669 or lower, you’re in the fair-to-poor range and may want to hold off on getting this loan to avoid a high monthly interest rate. See what your options are for improving your credit score and consider applying again when your score has improved.
“Lenders often see people in ‘poor’ credit ranges as risky, and as a result, might not issue a new loan to someone in that range,” according to the consumer credit reporting agency Experian. If your FICO score is in that fair-to-poor credit range and you’re approved to consolidate your debt, “the interest rate on your new loan could, in some cases, be higher than the APR on your existing debt.” Be sure to talk to your lender about your options so you can make the best financial decision for your situation.
Is a Personal Loan for Debt Consolidation Worth It?
If your FICO score is good and you’re prudent about your spending, then using a personal loan for debt consolidation could help you save money on interest and settle your outstanding balances without the chaos of multiple monthly bills.
Improving your relationship with money and getting educated about creating a healthy financial life is a slow and steady process. If you’re interested in a debt consolidation loan, get a good grasp of your current financial state and talk to your lender about which options are best for you. After all, a personal loan for debt consolidation is meant to help you simplify your financial plan – not complicate it.