Debt consolidation loans can help you manage and pay off multiple debt obligations
Credit card debt, student loans, medical bills, and more create multiple debt obligations. This amount of debt can make the path to financial freedom seem overwhelming. Add in a poor credit rating or history of bankruptcy and things can get even more difficult.
Debt consolidation provides a solution for the overwhelming stress of managing multiple payments. With a single loan application, you can combine unsecured debt to a single lender. That means one monthly payment and, potentially, a lower interest rate.
There are many ways to consolidate your debt. Loan refinancing, using home equity or taking out a personal loan are a few of the options.
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Loan refinance, personal loans or home equity loans
2 to 15 years
< 1 to 30 days
There are three primary ways to consolidate your debt: refinancing your existing loans, taking out a personal loan or using home equity to pay off your debt.
When refinancing existing loans, debt is packaged into a single loan with the intention of obtaining better terms — either a lower interest rate or lower monthly payments over a longer period of time. Lenders will assess your credit score when setting interest rates, and approval typically can be obtained in a few days or less. Application or early repayment fees may apply.
You can use a personal loan to pay off your debts, bundling your debt into a single, unsecured loan with a fixed or variable interest rate. Your credit score will influence the maximum loan amount and interest rates. Personal loans are medium- to short-term loans – typically five years or less – and may result in a higher monthly payment. Some lenders charge origination fees of as much as 6 percent as well as prepayment penalties. A personal loan can be obtained in a few days or less, with fund disbursement following a few days after.
Home equity can be used either through a home equity loan or home equity line of credit. A home equity loan is a lump sum loan secured against your home, while a home equity line of credit is a revolving credit facility that can be repeatedly drawn on and paid off. Maximum loan amounts for both are typically as much as 85 percent of the home value, minus any outstanding mortgage amounts.
Obtaining a home equity loan or home equity line of credit can take up to a month to complete, with application approval taking up to 10 days and fund disbursement up to four weeks following approval. Typical fees for a standard mortgage apply, oftentimes alongside an annual fee for the duration of the loan.
As a secured loan, using home equity gives lenders the confidence to offer lower interest rates than on unsecured loans. However, if the repayment period is extended with a home equity loan or you end up carrying a balance on a home equity line of credit, you may end up paying more interest in the long run. Most importantly, as a loan secured against your property, you risk losing your home if you default.
Consolidation does not reduce or eliminate debt, but combines it under better rates for easier management. Watch your spending carefully after consolidating to avoid getting further into debt.
Federal student loans, private student loans or a combination of both can be consolidated into one vehicle with potentially lower interest rates.
Credit cards typically carry very high interest rates. Consolidating existing credit card debts into one loan with lower rates can save you money.
If you refinance your loans at a lower rate, you can extend the repayment period and reduce your monthly payment.
Debt consolidation loans vary in terms and rates. That is why you should shop around and compare offers from debt consolidation lenders. Generally, lenders determine debt consolidation loan terms and rates based on the following criteria.
When you have low or poor credit scores, debt consolidation is more challenging, but not impossible. First, work on boosting your credit score to improve your chances for financing and obtaining lower interest rates.
If your credit rating is 620 or higher, consider a home equity loan. If you default on the loan, however, you risk losing your home.
If your credit score is lower than 620, consider consolidating your debt with a personal loan. A secured personal loan, also known as a title loan, allows you to use an asset for collateral and results in lower interest rates. An unsecured personal loan is more risky for the lender, so tends to have higher interest rates. Compare rates and fees carefully to ensure that consolidation still will save you in the long run.