There are a thousand and one ways for an otherwise financially responsible person to end up in debt. Unfortunately, getting into debt is always much easier than getting out of it.
If you find yourself neck deep in credit card debt, it can be demoralizing. Each month, you watch the majority of your payments go towards interest instead of your principal, and before you know it, you’re struggling to keep your head above water.
A debt consolidation loan may be the best way for you to get a handle on your debt and begin working your way out of debt completely. Whether you have good, fair, or bad credit, a debt consolidation loan may be the answer for you.
Today, we’ll cover everything you need to know so you can find the best debt consolidation loan for your needs.
What Is A Debt Consolidation Loan?
A debt consolidation loan allows you to roll all of your high-interest debt (think credit cards, hospital bills and that kind of stuff) into a more manageable, single payment each month.
These loans generally have considerably lower interest than the interest rates of credit card companies, and they eliminate the need to keep track of different due dates and payment amounts.
Debt consolidation loans are available in two forms: secured and unsecured. Secured debt consolidation loans involve you putting up something valuable as collateral for the loan, like your home.
Meanwhile, an unsecured loan doesn’t involve you putting up any collateral.
Secured loans offer better interest rates, but they come with some inherent risks for the lender, such as the loss of their collateral if they default on the loan.
Debt Consolidation Loans Pros and Cons
Each person’s financial is different. Mine is different from yours, and yours is different from the guy or gal up the block. Weighing the pros and cons of debt consolidation is an important step in deciding whether or not a debt consolidation loan is in your best interest.
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Are Debt Consolidation Loans Taxable?
Depending on the type of loan you have, it may or may not be taxable. If you have a secured loan, you’re usually able to deduct the interest on your taxes each month.
If you have an unsecured loan, you won’t be able to deduct interest on your taxes.
Do Debt Consolidation Loans Work?
Like most financial services in the world, debt consolidation loans work if you work them.
If you treat your debt consolidation loan as a way to pay down your debt, make on-time payments, and manage your spending as you pay off your loan, a debt consolidation loan can work well for you.
Meanwhile, if you treat a debt consolidation loan as if it’s a clean financial slate, and continue to rack up new debt, there’s a strong chance that you won’t have a good experience.
Are Debt Consolidation Loans a Good Idea?
Whether or not a debt consolidation loan is a good idea for you differs from person to person.
Depending on your level of debt, your financial situation and other external factors, a consolidation loan may be a good or bad decision for you.
If you’re able to secure a loan that will save you money in interest compared to what you’re paying on your current bills, and you’re serious about getting yourself out of debt, there’s a strong chance that a debt consolidation loan can be a useful financial tool for you.
How Do Debt Consolidation Loans Work?
There are several different ways that debt consolidation can work. Depending on your financial situation, you’re likely to find that one of these methods is best for you.
One option is to open a new credit card with a 0% interest introductory period. These periods typically last 12-18 months and allow you to transfer debt from other credit cards with higher interest rates to the no interest card.
You’ll need to pay your balance in full before the introductory period ends to reap the benefits of a 0% interest balance transfer. This type of debt consolidation is extremely useful, but if you have more debt than you’re able to transfer to the new card, it may not work for you.
The other, more popular option is to secure a debt consolidation loan. With this type of loan, your lender provides you with the money you need now to pay off all of your debt. Then, you’ll make installment payments to the lender until you’ve paid off the loan in full.
Secured loans, where you offer collateral in exchange for the loan are riskier for you but will provide a better interest rate. These loans can save you money in the long run, provided you pay your loan off on time and in full. Unsecured loans have higher interest rates than secured loans, but they’re usually the safest option for consumers.
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What to Consider When Shopping for A Debt Consolidation Loan
Not all debt consolidation is created equally, and it’s critically important that you shop around to find the most attractive terms for your situation. Here are some important things to think about when evaluating different lenders.
Costs - Debt consolidation ends up being an easy way for borrowers to save money on their debt in many cases. But, not everyone is going to benefit from a debt consolidation loan. It’s helpful to use a debt consolidation calculator to determine if this type of loan is a good option for you.
Alternatives - While debt consolidation is a smart choice for many people, there are other options that can help you become debt free as well. Before deciding on a consolidation loan, consider whether or not it would make sense to transfer debt to a 0% interest credit card, or pursue a personal loan from a local credit union.
Careful planning - Once you’ve consolidated your debt, it’s going to feel like a weight has been lifted off your shoulders. But, keep in mind how easy it was for you to get into debt in the first place. It’s just as easy to get yourself back into debt. Make sure to create a plan for becoming debt free and see it through to the end.
Go shopping - If debt consolidation is the best option for you, don’t jump at the first lender with a proposal that fits your needs. Instead, shop around. You’re likely to find that the interest rates from different lenders can vary by a few percentage points or more. Shopping around can help save you lots of money in interest payments.
What to Avoid
As you look for the best debt consolidation option, you should also know how to avoid predatory lenders and bad deals.
When it comes to debt consolidation, if it looks too good to be true, it probably is.
Avoid words like “guaranteed approval” or promises of quick success.
Becoming debt free is a marathon, not a sprint, and any company that claims you can be debt free in X amount of time without knowing anything about your current situation is probably lying to you.
You’ll also want to avoid any lender that wants an upfront payment or wants to charge you a fee for applying. Finally, if a lender has a hard sales pitch that makes you feel uncomfortable, it’s best to avoid them as well.
What to Look For
When shopping for the best debt consolidation loan, look for a lender that seems to have your best interests in mind. You should be able to communicate easily with a member of their team and get answers to any questions you may have about the process.
You’ll also want to look for a lender that provides the best possible terms given your situation. Depending on the state of your credit, you may not have a ton of different options.
Regardless of how many options you have, make sure that the one you choose is going to make it easier for you to reach your goal of being debt free than the alternatives.
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Are Debt Consolidation Loans Easy to Get?
Debt consolidation loans are awarded based on tons of different factors.
Obviously, the lender is in the business of making money, and they aren’t going to provide you a loan if they don’t feel that it’s in their best financial interest.
The lender is going to evaluate your situation based on many factors, like your creditworthiness, and your debt to income ratio. They’ll also look for any red flags in your financial history, like bank liens, foreclosures, or bankruptcy.
As a general rule, the better your credit is, the more loan options you’ll have, and the less you can expect to pay in interest. But, even people with poor credit should still have some debt consolidation options available to them.
How Much Debt Consolidation Loan Can I Get?
The size of the debt consolidation loan is going to vary depending on several factors.
All of the factors that determine your eligibility for a loan in the first place, like your debt to income ratio, your creditworthiness, and your credit score all play a role in determining the size of the loan you can get.
Lenders are also in the business of providing a solution that works for their customers, so the amount of money you need to completely pay off your credit card debt is also considered when evaluating the size of a loan.
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Top11: Best Debt Consolidation Loans
Rounding out our top eleven lenders for debt consolidation is Rocket Loans, which is the new personal loan branch of one of the country’s largest lending groups, Quicken Loans.
Rocket Loans offers favorable terms and lightning quick funding for borrowers with a minimum credit score of 640. The average credit score for Rocket Loans’ borrowers is higher.
The APR of a loan from Rocket ranges from 5.98-28.99% with an origination fee of 1-6%. Rocket Loans offers loans as small as $2,000 or as large as $35,000. The duration of a loan from Rocket Loans ranges from three to five years.
As the name entails, Rocket Loans aims to provide rocket fast service to their customers. Just like their sister company Rocket Mortgage, the lending process happens completely online, and loans can be funded more quickly than most other lenders.
Loans of under $25,000 can usually be funded the same business day, provided that they’re processed before 1 pm EST.
Larger loans usually require a day or two to process, and Rocket Loans reports that 90% of their loans are fully funded within one business day.
As such, Rocket Loans may be the best option for those who have good credit and need cash fast.
We’ve already covered a few different options for borrowers with less than stellar credit scores. Lending Point is another option that may provide you with the best possible terms.
If you’ve been unable to secure a loan from other lenders, Lending Point may still be an option for you. While they evaluate your credit score to determine loan eligibility, they also look at other aspects of your life, such as your current employment status to determine eligibility.
Most Lending Point borrowers have a score above 600, but even if you don’t meet that score, it’s still worth taking the time to apply.
If you’re looking for a lender with flexible payment terms, Lending Point is worth a closer look. You’re able to make payments bi-weekly, every 28 days, or monthly over the life of your loan, which is going to be from two to four years.
As with other lenders that cater to borrowers with below-average credit, the APR is higher than with other lenders. APR ranges between 15.49-35.99% with origination fees of up to 6%.
If you’re offered a loan from Lending Point with terms on the higher end of their range, you’ll need to evaluate if a consolidation loan is your best financial option.
One Main Financial
One Main Financial is well known for offering loans where other lenders have refused. Their terms aren’t the most favorable in our roundup, but they provide a solid option for those who have had trouble securing a loan elsewhere.
While most lenders require a minimum credit score for application, One Main does not. The average credit score of their borrowers is between 600-650, but even people with much poorer credit scores can apply and be approved for a loan.
As you’d imagine, their rates are on the higher side. One Main Financial loans carry a minimum APR of 16.05-35.99%. The origination fee varies depending on state laws.
Borrowers who are looking for a more traditional banking experience are sure to appreciate working with One Main Financial, as they have over 1,600 locations nationwide, so borrowers can receive a loan in person instead of online if they wish.
Their loans can be funded by check on the same business day they’re approved, whereas loans by wire transfer typically take one or two additional business days.
Around half of the loans issued by One Main Financial are secured loans, and the minimum rate for a secured loan is 9.99%.
Other institutions may offer a more favorable APR for a secured loan, but One Main may be the best choice for somebody with poor credit who is looking for a secured loan to consolidate their debt.
Pay Off may be a great option if your credit is fair or better, and you could use some help improving your financial literacy in addition to your loan.
Pay Off’s terms are similar to the terms offered by Best Egg. Annual APR ranges from 5.99-24.99%. They also charge an origination fee of up to 5%. They offer loan sizes from $5,000-$35,000.
One thing that’s different about Pay Off is their member advocacy program. Through this program, Pay Off provides borrowers with ongoing support throughout the life of their loan. Member advocates are available to answer any questions you have about your loan, as well as provide financial advice.
Pay Off also offers impressive payment flexibility, and borrowers can change payment dates and defer or skip payments.
You’re also able to apply for a loan with a limited credit history of only two years, which is a major selling point for younger borrowers, or anyone without much credit history.
Pay Off may not be your best option if you need money immediately, as they take between two and seven business days to fund their loans.
Beyond SoFi, Best Egg is another viable option for borrowers with good credit who are looking to consolidate their debt.
Best Egg offers loans between $2,000-$50,000 with lending periods between three and five years. The APR of Best Egg loans is competitive, with a range of 5.99-29.99%. There is also an origination fee between .99-5.99%.
Larger loans are subject to additional restrictions, such as a credit score over 700. One knock against Best Egg is that their best rates seem to be dependent on loan size and term. Even borrowers with great credit may be subject to higher rates if they’re looking to borrow the maximum of $50,000.
The average Best Egg customer has a good credit score in the 685-700 range, but Best Egg will accept loan applications from anyone with a score over 640.
Best Egg doesn’t have a minimum credit history requirement, but the average customer has about seven years of credit history on file.
Few lenders have this kind of glowing reputation.
Debt consolidation isn’t limited to those with poor, fair or average credit scores. There are plenty of reasons for someone with great credit to consolidate their debt as well. If you have good credit, one of the most compelling debt consolidation options is SoFi
The average SoFi customer has a FICO score of over 700, although they do work with people with scores as low as 660. SoFI loans are available from $5,000-100,000, which is the highest range of any lender on our list. At the same time, their $5,000 minimum may deter borrowers who are looking for a smaller loan.
SoFi also provides unique services for their customers, including an entrepreneur program, career services and invites to special events. They also have an unemployment insurance program, where customers who have become unemployed can temporarily pause their payments.
Sofi's rates range from 6.99-14.87% APR, and there are no origination fees or pre-payment penalties over the life of your loan.
One of the most frustrating aspects of having a poor credit score is that it’s more difficult to find help so you can pull yourself out of a financial hole. Most lenders are unwilling to work with people with poor credit, and some of the lenders who use predatory practices that often leave people worse off than before they started.
Fortunately, Avant serves as a viable option for those looking for a consolidation loan despite their poor credit score.
People with poor credit are usually subject to less favorable borrowing terms, and Avant is no different. While most lenders have APR minimums in the 5-6% range, Avant’s loans begin at 9.95%, with a maximum of 35.99%.
It’s worth noting that lower interest rates have always been reserved for those with tremendous credit, so the fact that Avant’s minimum is higher than the competition should come as no surprise.
Avant offers loans from 2,000-35,000 and funds are available the next business day for loans approved before 4:30 pm CT. In addition to the interest rate, customers are also charged an administrative fee of up to 4.75% of the loan.
Unlike many other lenders, Avant also has a mobile app that makes it even easier for you to manage your loan, so you’ll be able to stay on top of your financial future even when you’re on the go.
Many people who struggle with debt often wonder what is the best debt consolidation loan for bad credit. While your credit may be less than average, there are still some viable options for you to look into, including Upgrade.
Upgrade was founded by two of the executives behind the launch of Lending Tree, so they bring years of expertise to the field despite the fact they’ve been a company for less than a year.
Upgrade offers loans from $1,000 up to $50,000, and unlike many lenders who are unwilling to work with customers with fair credit scores, the minimum credit score to apply for a loan is only 620.
In addition to loans, Upgrade is also a great financial literacy resource. They provide tons of useful insight on topics such as improving your credit score, having incorrect items removed from your credit score, and suggestions on how to best pay off your debts.
Upgrade offers competitive rates, with loans ranging from 6.99-35.97% with a one-time origination fee of 5%, and their loans are provided by WebBank, the same lender who funds loans from Lending Tree.
Upgrade also makes accessing your loan funds easy, with loans being processed in as little as one business day. Considering they offer competitive terms and are more willing to work with people with checkered credit histories, Upgrade is a lender to take a closer look at.
In addition to carrying the most recognizable “brand name” of all the lenders we’ll be discussing, Marcus by Goldman Sachs also provides some of the most favorable terms for those with average credit.
Two things about Marcus stick out: First, they don’t charge any fees. This means you’ll never pay an origination fee, late payments fees, or any other fees that are typical with other lenders. The second thing to note is that Marcus’ maximum APR is considerably lower than Lending Club or Prosper. Marcus’ APR caps out at 24.99%, which is about 11 points lower than the competition’s maximum APR.
On the surface, it seems like Marcus is the best option we’ve covered thus far. It’s important to keep in mind that while Marcus may offer favorable terms, they’re also in this business to make money.
Sure, their fee structure is more favorable, and they have a lower maximum APR, but their interest rates are often higher than their competitors for these reasons.
But, if you have average credit and you’re able to get approved for a loan through Marcus, they do provide favorable terms and competitive interest rates, which makes them one of the best around.
One thing to note is that Marcus has a higher minimum APR than most of the competition. Their minimum is about a point higher than other companies.
However, since the lowest rate is reserved for customers with absolutely sterling credit scores, this shouldn’t concern most people.
If your credit score falls in the fair to good range, Prosper is another lender you’ll want to learn more about.
Prosper’s rates are nearly identical to Lending Club, with APRs ranging from 5.99-35.99% Their origination fees are also virtually identical.
One important difference between Prosper and Lending Club is that if your credit score is on the lower side of fair, there’s still a good chance you can be approved with a manageable rate.
Another difference to take note of is that Prosper doesn’t offer the same payment date flexibility as Lending Club. Once you have your payment date, it’s stuck that way forever.
Prosper also does a great job of speaking with customers in transparent, easy to understand terms. A friend of mine recently applied for a loan from Prosper and was denied.
The company made it clear exactly why they were being denied and provided actionable advice to help them improve their credit while they continued to weigh different loan options.
If your credit is middle-of-the-road, Prosper is a lender to inquire with. Plus, since checking your loan rate won’t impact your credit score, there’s no reason not to shop around with as many lenders as possible.
Lending Club is one of the most interesting lenders on our list. Beyond the debt consolidation services they offer through financial institutions, Lending Club was also the first peer-to-peer lending company to register its offerings on the SEC.
If your credit is somewhere in the realm of fair to good, Lending Club may be a worthwhile option for you to take a closer look at.
Consumers can secure debt consolidation loans up to $40,000 through Lending Club.
Interest fees with Lending Club range from 5.98-35.89%. There is also an origination fee that ranges from 1-6% (the average origination fee from Lending Club is 5.49%.)
For people with poor credit, Lending Club is probably not your best option. Assuming you’re able to get approved for a loan despite your credit history, you could be looking at sky-high interest rates that eclipse 40% annually.
Lending Tree is one of the most flexible lenders concerning payment due date. Customers can modify their payment date to fit their needs. They do charge one odd fee that’s rare for most online lenders.
If you make your payments by check, you’ll be charged a $7 processing fee for each check. Most people pay their loan by bank transfer, so most customers aren’t subject to this charge.
According to a survey Lending Club conducted in 2017, the average Lending Club member has been able to save an average of $287 each month by consolidating their debt with Lending Club. While savings per month will vary from person to person, these impressive savings figures are encouraging to see.
For these reasons, Lending Club is one option to look into more closely if you have fair to good credit and are looking to consolidate.
Debt Consolidation Loan vs. Debt Settlement
You may have heard of, or are considering another option to get out of debt, like debt settlement. You can pursue debt settlement on your own by contacting creditors and inquiring about settlement options. It’s also not uncommon for a creditor to contact you offering debt settlement should you fall behind on your payments.
Debt settlement allows you to settle your debt for less than you owe, provided you pay off the debt almost immediately. Some creditors may offer a short installment plan, where you pay the agreed amount over three or four installments.
You can also hire a debt settlement company to work on your behalf. These companies will work with your creditors to achieve more favorable terms for the lender. This may include a reduction of your total debt to a creditor, or a reduction in interest.
Each lender is different, and not all lenders are willing to work with you towards debt settlements. Also, debt settlements tend to have more negative effects on your credit than a consolidation would.
Like debt consolidation, there are also tax implications with debt settlement, and you should learn more about them before entering into a settlement plan.
Will A Debt Consolidation Loan Hurt My Credit?
Your credit score is determined by a seemingly endless combination of different factors, which makes it difficult to say whether or not debt consolidation will hurt your credit.
Ultimately, your credit is going to improve, especially as you inch closer to becoming debt free. But, there’s a chance that your credit score may take a hit initially. You can learn more about the different factors that affect your score here.
Last Words: Is a Debt Consolidation Loan Right for Me?
Debt consolidation has helped countless Americans on their path to financial freedom. You may be the next success story who consolidates their debt and enjoys a debt-free future.
Whatever you choose to do, make sure you fully evaluate all your options and opt for the best debt consolidation loan for your needs.
Have you consolidated your debt successfully? Are you considering debt consolidation? and share this article with friends and family who may need more info on debt consolidation as well!