Question 1

What is a debt consolidation loan?

Accepted Answer

A debt consolidation loan is any loan that you use to pay off multiple debts. Instead of multiple payments, you only have one payment to manage; and, ideally, the interest rate on the debt consolidation loan is lower than the net interest you paid prior to consolidating debt. You can use a personal loan, a home equity loan, or a credit card balance transfer to consolidate debt.

Question 2

How can I get a debt consolidation loan?

Accepted Answer

You can get a debt consolidation loan from a number of personal loan lenders. Ideally, you’ll have a good credit score (a FICO score of 670 or above), sufficient income to make monthly payments, and a debt-to-income ratio (DTI) below 36%. However, since you’re not taking on new debt, you may get approved with a higher DTI.If your credit score isn’t good, you may still be able to get approved by a lender that offers personal loans for fair credit. Borrowers with bad credit should consider applying with a cosigner or co-borrower, or using collateral to get approved.

Question 3

What factors impact debt consolidation loan rates?

Accepted Answer

Debt consolidation rates are impacted by a range of factors, including:Your credit score: A higher credit score usually means a lower annual percentage rate (APR).Your DTI: A lower DTI will help you qualify for a lower APR.The loan amount: Higher loan amounts may have higher APRs.The repayment term: Shorter repayment terms often have lower interest rates, but not always.The lender: Rates differ across lenders, which is why it’s best to prequalify with multiple lenders to find the best debt consolidation loan rates.

Question 4

What are the pros and cons of a debt consolidation loan?

Accepted Answer

Pros:Trade multiple payments for one payment.Potentially lower your interest rate.Potentially lower your monthly payment.Decrease your credit utilization, in some cases, and quickly increase your credit score.Get a clear timeline for paying off debt.Improve your credit in the long term by making timely payments.Many lenders can pay your creditors directly (and give you a discount for it).Funding can be quick with a debt consolidation personal loan or credit card balance transfer.Cons:The loan application may temporarily lower your credit score.Some loans have origination fees.It can be hard to qualify for debt consolidation if you have bad credit.It will hurt your credit if you can’t make payments.You may be tempted to borrow more money than needed to pay off debt.Loan approval and funding can take a month or more with a home equity loan.Read more: Pros and Cons of Debt Consolidation

Question 5

How do I compare debt consolidation loans?

Accepted Answer

When shopping for debt consolidation loans, follow these steps:Consider how much money you need to consolidate your debt.Prequalify with a few lenders to get a sense of the APR you’ll pay.Use a personal loan calculator to estimate monthly payments based on that APR for different repayment periods.Find lenders that offer the loan amount you need and the repayment term you want.Prioritize lenders that pay your creditors directly (some will give you an interest rate discount for doing so).Prequalify with those lenders to find the loans with the best terms and lowest APRs for you.Seek out lenders without origination fees — an origination fee is deducted from the amount you borrow upfront and will reduce what your creditor receives.

Question 6

How does a debt consolidation loan affect your credit score?

Accepted Answer

A debt consolidation loan should improve your credit score if you make timely payments and pay off the loan in full. When you first apply, you may see your score dip by a few points — but this is temporary and shouldn’t last more than a year.If you’re consolidating credit card debt, you could quickly see an increase in your credit score once your credit cards are paid off. This is because your credit utilization will decrease as long as you keep those accounts open. If you make late payments, or fail to pay off the loan, a debt consolidation loan could hurt your credit.

Question 7

What are the alternatives to a debt consolidation loan?

Accepted Answer

While a personal loan is often a great way to consolidate debt, it may be easier to qualify or get a lower rate with other options. Consider these alternatives:Credit card balance transferHome equity loanHome equity line of credit (HELOC)Cash-out refinance (home or car)Cash-value life insurance loan401(k) loanBorrow money from friends and family

Question 8

Can I refinance a debt consolidation loan?

Accepted Answer

Yes, you can refinance a personal loan used for debt consolidation, and you may be able to refinance a home equity loan or HELOC used for debt consolidation as well. If you used a credit card balance transfer, you can’t refinance it, but you could roll the balance into a personal loan at a lower rate if you aren’t able to pay it off within the promotional APR period.

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