Debt Consolidation Loans: What You Should Know

Debt consolidation loan application form with pen, calculator
Debt consolidation loans combine multiple debts into one loan, potentially saving you money.

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If you’re struggling to manage debt on multiple credit cards, a debt consolidation loan could simplify your monthly finances and help you regain control. When you take out a remortgage loan, you pay off multiple debts and replace them with a single loan at a fixed monthly rate. You may even be able to reduce your interest costs and monthly payments.

If this sounds like something you would benefit from, you should speak to a lender. You can get a debt consolidation loan quote today.

What is a Debt Consolidation Loan?

A debt consolidation loan can be used to pay off multiple debts, including credit cards, medical bills, and personal loans. Debt consolidation loans are a type of personal loan that allow you to combine multiple high-yield credit cards with a lower-interest loan.

You can qualify for a debt consolidation loan of up to $100,000 with flexible repayment terms, typically between two and five years.

Why would anyone want a debt consolidation loan?

Taking out a debt restructuring loan can make sense if one of the following circumstances applies to you:

  • You want to pay less interest. If you have multiple high-yield credit cards, this is something to consider debt consolidation into a personal loan with a lower interest rate. According to the latest data from federal reserveFor example, the average interest rate on a 24-month personal loan is 8.73%, well below the average credit card rate of 16.65%.
  • You want a specific repayment date. Credit cards offer a convenient way to borrow and pay off debt, but making only minimum payments could leave you in credit card debt indefinitely. Because of this, you may want a debt consolidation loan to follow a repayment schedule for a specific term, with a specific end date by which your final payment will bring your balance to zero.
  • Your credit score is sufficient to qualify. While personal loans are available to borrowers with below-average credit ratings, higher credit ratings may qualify you for lower interest rates. Typically, the better your credit score, the lower the interest rate you can get. As a rule, you can qualify for favorable conditions with a good creditstarting with a FICO score of at least 670 or a VantageScore of 661 or higher.
  • You can pay off your consolidation loan in five years or less. Debt rescheduling loans are installment loans with terms of usually two to five years. Of course, the longer you pay off the loan, the more interest you pay. A debt consolidation loan might be a viable option if you can minimize interest costs by paying off your loan in less than five years.

The benefits of a debt consolidation loan are many. Save money and get out of debt by exploring your loan options now.

How Do You Qualify for a Debt Consolidation Loan?

Debt consolidation loan eligibility varies by lender, but most lenders strongly consider the following eligibility factors.

  • Proof of Income: Almost every lender will require you to meet a minimum income to prove you have the financial stability to pay off your loan. Minimum income levels vary by lender, and you will likely need to provide proof of income on payslips, bank statements, or tax returns.
  • Credit Report and Credit Score: When a lender reviews your application for a debt consolidation loan, they typically use your credit report and credit history to assess your credit history. If your credit score is below average, you might be better off taking steps improve your credit score before applying for a new loan.
  • Low Debt to Income Ratio (DTI): Your debt-to-income ratio (DTI) is another important criterion that lenders use to evaluate your ability to repay your loan. The ratio compares the total amount of your monthly debt payments to your gross monthly income. For example, if your monthly gross debt payments are $1,000 and your monthly gross income is $5,000, your DTI ratio is 20% (1,000/5,000 = 0.200). Aim for a DTI of 36% or less for the best loan approval rates.
  • Security: Some lenders require collateral for larger debt consolidation loans, often in the form of home equity.

Note that some lenders charge a processing fee (also called a loan origination fee) of between 1% and 8% of the amount borrowed.

How do you apply for a debt consolidation loan?

Completing a debt consolidation loan is easy and quick, and you can apply by following these five steps.

  • Buy and compare lenders. Comparing multiple loan offers can help you find the best debt consolidation loan for your needs. Many online lenders allow you to pre-qualify for a loan to assess your chances of approval and the interest rate you may receive. When you pre-qualify, the lender typically performs a soft credit check that doesn’t affect your credit score.
  • Select your loan offer and your lender. Consider loans with the best balance of low interest rates and fees, flexible repayment terms, and achievable eligibility requirements. After reviewing several personal loan offers, select the one that best suits your needs.
  • Fill out a loan application. Once you have decided on a lender, submit an official application. You must provide details of employment, income, and the amount of money you wish to borrow. Your lender may ask you to provide supporting documentation, including a government issued ID, payslips, bank statements, and proof of residence.
  • Pay off your debts. Once your lender has approved your loan application, you will need to sign the loan to release the funds. Your lender can pay your loan funds directly to your competitors to pay off debts on your behalf. Alternatively, your lender deposits the money into your account and uses the money to pay off each of your debts.
  • Keep making payments. After loan approval, you are responsible for paying your new loan. However, it may take some time for your old creditors to close your accounts. To protect your creditworthiness, continue to pay into your old accounts until they are formally closed.

Alternatives to Debt Consolidation Loan

If you don’t want to take out a debt consolidation loan, there are other options you can consider such as:

  • 0% APR Credit transfer credit card: These credit cards offer an interest-free period of up to 21 months. You can pay off as much debt as you can with 0% interest during the promotional period, but understand that these cards usually require good credit to qualify.
  • Home Loans: You may be able to tap into your home’s equity to pay off your outstanding debt. Generally, lenders allow you to borrow up to 80% of the value of your home minus your mortgage balance. Home equity loans come with a significant amount of risk because you have to offer your home as collateral.
  • Credit advice: Instead of borrowing money to pay off your debt, you might consider getting credit counseling from a nonprofit agency. An advisor can help you set a budget and create a repayment plan. Some agencies will even contact your creditors to lower your interest rates. Online financial advisors can also help point you in the right direction.

Whether you take out a debt restructuring loan or use another method, Reduce credit card debt can dramatically improve your financial health, but only if you can avoid accumulating new debt and repeating the cycle. As a general rule, you should never charge more than you can afford to pay off.

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