How Consolidation Loans Can Help You Get Rid of Debt

How Consolidation Loans Can Help You Get Rid of Debt

How Consolidation Loans Can Help You Get Rid of Debt

Holding onto debt is difficult. Not only must you pay for your basic living expenses, but you’re also stuck with making regular payments towards your credit card, auto loan, medical debt, or other outstanding balances.

With inflation at the highest levels seen in over 30 years and housing costs up by double digits over the past year, it can be hard to keep your finances in balance. Fortunately, there are options for getting out of debt. A consolidation loan is one of them.

What Is a Consolidation Loan?

A consolidation loan is obtained from a debt consolidation lender to help pay off debts. While a regular consumer loan can be used for multiple purposes, the debt consolidation loan is used exclusively to pay off existing creditors.

Once your current lenders receive their payments to resolve outstanding debt, you’ll make a single monthly payment to your new debt consolidation lender. [1]

Debt consolidation loans are term loans, which means that you will have a specified period to pay them back. Usually, this is between one and five years.

Your interest rate will be fixed so that you can count on your payment remaining the same during the life of the loan. In many cases, the interest rate you pay on your consolidation loan will be less than that demanded by your other creditors. [1]

To obtain a debt consolidation loan, you’ll need a decent credit score, usually 650 or above. This score will allow you to qualify for the cheapest debt consolidation loans.

If you don’t have good credit and aren’t able to qualify for a debt consolidation loan, you can try to increase your credit score and reapply in a few months. In some cases, debt settlement may be a better alternative for those with poor credit. [1]

A debt consolidation loan will often enable consumers to pay off their debts in a shorter period with less interest expense. The loan structure allows interest to be calculated at a fixed rate, whereas many credit cards are variable.

In addition, making a single payment that is used to pay down the total balance of debt often results in a greater amount applied to the principal than would occur if you just paid your original creditors their monthly minimum payments.

Since the debt consolidation loan is used to pay off creditors and does not result in interrupted payments, there is usually little to no impact on your credit score. This protection allows you to obtain future financing, should you need it.

What Are the Pros and Cons of Consolidation Loans?

There are several benefits to obtaining a debt consolidation loan.

Advantages

The advantages of consolidating debt include:

  • A simple, single monthly payment, rather than multiple payments
  • Fixed interest rate
  • Shorter repayment period that is customizable
  • Potentially lower the amount paid each month towards debt
  • Possibility of improved credit if you pay your new lender on time each month

Keep in mind that you’ll need to stick with your debt consolidation loan’s repayment schedule to maximize your benefits. If you fail to make your payments on time, it could negatively impact your credit. [2]

Disadvantages

There are a few drawbacks to obtaining a debt consolidation loan. These include:

  • The loans are hard to qualify for without good credit
  • They may include an origination fee, which can increase your costs
  • They can result in more debt if you begin using your credit cards again

Individuals can find that they return to their credit cards during the debt consolidation program, resulting in more debt. In this case, it may be best to work with a credit counselor while undergoing debt consolidation to build personal finance skills. [2]

What Lenders Offer Debt Consolidation Loans?

If you’ve decided to look into debt consolidation loans, you’ll want to work with a proven, reliable company. Don’t sign the papers for your new loan until you fully understand the terms of your agreement.

Make sure that the loan you choose doesn’t charge high origination fees that could increase the expense you pay to the bank. It’s best to shop around before deciding on a loan, so you have several options to choose from. [2]

A few of the top consolidation lenders include:

Lending Club

Lending Club is a lending marketplace designed to help users pay off their high-interest creditors within a short period. Their personal loans may be used for debt consolidation or many other purposes.

Interest rates range from 6.34% to 35.89%, and there are no prepayment penalties. The company charges origination fees, which typically vary from five percent to six percent of the loan value.

Borrowers may obtain up to $40,000 with a personal loan, and repayment terms are between three and five years. [3]

SoFi

SoFi is a well-known online lender that offers personal loans between $5,000 and $100,000 that can be used for a variety of purposes, including debt consolidation.

Fixed interest rates start at 6.99%, and the company does not charge any origination or prepayment fees. You can apply for a personal loan with SoFi and receive funding on the same day in some cases. Loan terms with SoFi vary from one to seven years. [4]

Avant

Those with low credit scores may find it hard to obtain a debt consolidation loan. However, Avant caters to individuals with credit scores less than 600.

The company offers loans ranging from $2,000 to $35,000. APRs range from 9.95% to 35.99%. Repayment terms are anywhere from two to five years. The company charges an origination fee on its loans, which may be up to 4.75%. [5]

Choosing the Right Partner for Consolidation Loans

If you’re looking for a way to get out of debt, a consolidation loan can help. Those with good credit stand to benefit the most from a consolidation loan, as they will be more likely to qualify for lower interest rates.

Before agreeing on a loan, make sure to shop around with various lenders. This work can help you develop a better understanding of the loans available to you and help you make the best decision for your loan.

Resources:

[1] What Is a Consolidation Loan? | LendingTree

[2] What Is Debt Consolidation & How Does It Work? – Forbes Advisor

[3] Personal Loans | Get a Loan Online with LendingClub [2022]

[4] Personal Loans – Apply Online, Same Day Funding | SoFi[5] Personal loans: Apply for an online loan today | Avant

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