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Credit card debt is a fact of life for millions of Americans, but a debt consolidation loan may be your best bet to get rid of it. Many of us make monthly payments to multiple creditors — on different dates and for different amounts at varying interest rates — creating a web of seemingly never ending payments that is confusing and expensive.

Debt consolidation simplifies your monthly payments and ensures you’re paying off all your unsecured debt — which usually means credit card debt but can include personal loans — with the best possible terms.

What is a debt consolidation loan?

A debt consolidation loan usually refers to a personal loan that a lender gives you in one lump sum, which you use to pay off the balances on your credit cards or other qualifying debt. You then pay back the loan in fixed monthly payments over the course of a set number of months.

Loans like mortgages are considered “secured” loans because they’re attached to your home — which functions as collateral — but a personal loan is typically unsecured. That means a lender extends the loan based solely on the likelihood you’ll pay the it back, as determined by your creditworthiness.

Although less common, you can find secured debt consolidation loans too. In that case, you put up some asset, like a bank account, as collateral for the loan. You’ll lose that collateral if you default, so these loans carry added risk for you.

In general, debt consolidation loans make sense when they offer better terms and lower interest rates than the credit cards you’re paying off, allowing you to get rid of your debt quicker and cheaper.

Debt consolidation loan rates and terms

A debt consolidation loan typically has a term of three to five years, which works out to thirty-six to sixty monthly payments. Interest rates generally fall between around 5% and 35%, with the lowest going to to the most creditworthy borrowers or those that are secured. Loan amounts usually range from $1,000 to $35,000.

When is a debt consolidation loan a good idea?

Just because you’re strapped and paying off multiple credit cards each month doesn’t necessarily mean you should turn to a debt consolidation loan.

Here are some things that should go into your decision to pursue such a loan:

  • Credit score: If your score is 720 or above, you can likely qualify for credit cards with a 0% introductory rate that, in some cases, apply to balance transfers (which is why it’s best to use a balance transfer credit card). If that’s the case, you may want to transfer your existing balances onto one of those cards and use the introductory period — which can be as long as 21 months — to pay it off. If your score isn’t high enough, see how you can build your credit score
  • Home ownership: If you own your home, you may qualify for a home equity loan that you can use to consolidate debt. You can get lower rates on home equity loans than on personal loans, and the interest paid on a home equity loan is generally tax deductible (note: seek tax advice from a tax expert for more information on your specific situation). You’ll need to weigh the pros and cons in your particular situation — some experts say you should only take out home equity loans to pay for things that increase your home’s value. But it may be your best choice depending on your other options
  • Debt amount: A debt consolidation loan should be used to address burdensome debt that you’re truly struggling to pay. You’ll need to meet a minimum debt level to even qualify for such a loan, usually around $1,000. So if your debt is relatively small, and you can make more than the minimum payments, it often makes the most sense to just buckle down and pay off your debt as quickly as you can
  • Spending habits: A debt consolidation loan will not lock away your credit cards. The psychological effect of having a “clean slate” may tempt you into racking up a whole new round of debt, but be honest with yourself about what got you into trouble to begin with. Addressing those issues may be more important to your long-term financial health

Where to get debt consolidation loans

Debt consolidation loans are available from three main sources:

  • Traditional banks: Not all banks offer personal loans, for debt consolidation or any other purpose. When they do, the terms and rates may be worse than other options and the credit-score qualifications more stringent. If you have a long-standing relationship with a bank it’s worth asking what they can do for you. Just know that if your credit score is less than 700, this will likely not be your best bet
  • Credit unions: Non-profit credit unions typically offer better rates and terms with simpler applications than traditional banks, but you usually need to be a member to get a loan there
  • Online lenders: A new crop of online lenders has emerged in recent years, which generally offer lower rates and loans to individuals whose credit scores may disqualify them from traditional banks and credit unions. Credible provides you with a platform to compare prequalified rates from several online lenders in one place, so you don’t have to submit individual requests to all of them separately

What lenders look for in a loan application

Lenders take into account a variety of factors when assessing your loan request, although each lender uses a different “formula” to determine your creditworthiness.

Common factors lenders consider include:

  • Credit score: Your credit score is usually the most important factor. If it’s excellent (typically above 720) you are more likely to qualify for a loan
  • Credit history: Many lenders will want to see a credit history of at least one to three years with no bankruptcies within the past one or two years. They may also consider the number of credit inquiries you’ve had over the last year, your open credit lines, and any delinquent payments or charge-offs
  • Employment status: Lenders may require proof of income, and some will require a minimum household income to qualify for a loan, frequently between $20,000 and $40,000
  • Debt-to-income ratio: Your debt-to-income ratio is all your monthly debt (including housing payments) as a percent of what you earn each month before taxes. Generally, lenders consider DTI ratios under 36% as the best. Higher than 50% is usually considered bad

Many online lenders take into account other factors; it’s important to provide thorough and accurate information in your request.

Steps to apply for a debt consolidation loan

Online lenders have forms on their sites that you complete to apply for a loan. It’s generally a two-step process.

The first step is pre-qualification — with Credible, for example, you can submit basic personal information, the loan amount you are interested in, and a credit-score estimate, to see if you are eligible for a loan from one of Credible’s lender partners and what rates you prequalify for.

If you receive prequalified rates, you can submit a formal application for the option that is best for you. Before you start the loan request process, you should get some ducks in a row:

Take stock of your credit: Knowing your credit score gives you a good idea of whether or not you’ll qualify for a debt consolidation loan, let alone one with worthwhile rates.

Compute your loan request amount: Figure out how long it would take you to pay off all all your debt at your current payment rate, and the total amount you’d end up paying by the time you zero out the balances. That information will help you assess loans available to you.

Collect the information you need: Most personal loan request forms ask for proof of address, whether your own or rent, information about your employment status, your income, and your social security number, at minimum. Be prepared to provide accurate information.

Comparing debt consolidation loan offers

It might be tempting to jump on the offer with the lowest monthly payments. But you’ll want to weigh other factors to ensure you’re making the best decision for your situation.

When evaluating the costs of different loans, you’ll want to consider the following:

  • Total loan cost, not just monthly costs: For each offer, you should determine the amount you’ll actually end up paying at the end of your loan term. Your new monthly payments may be lower than they are currently, but if they’re stretched out over a long time — like five years — it may cost you more than paying credit card minimums, since interest will keep accruing. Some sites have debt consolidation calculators so you can easily compute total loan costs and compare them to your current debt
  • Origination fees: Most lenders charge you origination fees when you take out a loan. This is typically a percent of the overall loan amount, usually between 1% and 6%
  • Pre-payment penalties: Some lenders don’t want you to pay off your debt early, and will penalize you if you do so. The pre-payment penalty may vary depending on when in the loan’s life cycle you pay it off
  • Late fees: Lenders typically tack on a fee for late monthly payments, either as a percent of the monthly payment or as a flat amount
  • Scams: If a lender says your loan is “guaranteed” without getting much information from you, or if they charge you a fee upfront just to process your request, stay away. People saddled with crushing debt can be easy targets for scam artists, so make sure you’re only working with reputable, above-board lenders

Effect of debt consolidation loans on credit scores

Checking prequalified rates for loans on Credible will not affect your credit score. Those types of inquiries into your credit are called “soft pulls,” which are general “reads” of your credit strength. Other platforms will also provide a soft credit inquiry in order to provide you prequalified rates too.

When you actually apply for a loan, however, you trigger a “hard pull” on your credit. That goes into your credit history. Each formal loan request ends up shaving up to five points off your score, for about six months. If you apply for several loans within a 30 day period, that’s generally considered one request, so you’ll only be impacted by approximately one five-point deduction from your credit score.

But the hit your credit score takes with a “hard pull” may be more than counterbalanced by the benefits the loan provides your credit. Loan installment payments are generally better for your credit score than credit card debt, even if the total debt you’re paying off is the same. So erasing the maxed-out debt on those cards and replacing it with a loan may give you a credit boost.

Other debt that can be paid off with a debt consolidation loan

Credit card debt is not the only type of burdensome debt people deal with, and some may want to consolidate all their debt with a loan.

While most people turn to debt consolidation loans when they can’t pay their credit cards, you can use them in other situations, too. In fact, any unsecured debt can be addressed with a debt consolidation loan. This may include personal loans, department store or gas card debt, cell phone account balances, payday loans and medical bills. Take the time to research and weigh your options to decide if a debt consolidation loan is the best solution for you.