Is Debt Consolidation Right for You?

Repayment terms generally range from 2 to 6 years, though the exact range varies from lender to lender. If a lender approves you for a loan, it will almost always offer a better rate for a shorter length loan. A shorter time to pay off the loan will give you a larger monthly payment.

The first step is to list the amount owed on your monthly unsecured bills. Add the bills and determine how much you can afford to pay each month on them. Your goal should be to eliminate debt in a 3-to-5 year window. Reach out to a lender and ask what their payment terms – interest rate, monthly payment, and the number of years to pay it off – would be for a debt consolidation loan. Compare the two costs and make a choice you are comfortable with.

A high debt to income ratio is a barrier to getting a debt consolidation loan. If you have good credit, then some lenders may make an exception. Other lenders will consider offering a debt consolidation loan if you provide a co-borrower. If you own property and reduce your overall DTI to about 45%, then a home mortgage loan is another possibility. You can also consider other alternatives, such as a debt management plan or debt settlement.

Applying for a loan results in a hard pull, which hits your credit, generally resulting in a small drop. Some lenders use a hard pull to prequalify you, but you can find lenders that will use a soft pull for the prequalification, which does not affect your credit score.

Over time, a debt consolidation loan can improve your credit score. If you don’t run up new debt on the cards, pay off and make your loan payments, then you will boost your score by improving your credit utilization and having a more varied mix of types of credit on your report.

You can harm yourself in a few different ways in the debt consolidation process. You can take a loan that you can’t afford to pay. You can run up new debt, not use the funds to pay off the debt you planned to consolidate, and you can harm your credit by shopping for loans with lenders that do a hard pull when you keep getting turned down.

Learn more about the pros and cons of different debt consolidation solutions.

It is hard to find lenders who will make a debt consolidation loan to borrowers with credit scores less than 600 and even harder below 580. If you have bad credit, then consider other debt consolidation solutions.

The credit score that one lender requires may not be the same as another lender.  One reason for that is that lenders tend to focus on part of the market. For example, there are lenders that target customers with excellent credit. Their minimum credit score can be very high, where a lender that focuses on making loans to borrowers with fair credit will accept you with a much lower score. Find out your score before you start shopping and focus on lenders who specialize in borrowers with similar scores.

Debt consolidation can be a great idea. It should help you achieve an important financial goal such as saving money, lowering your monthly payment, or reducing your financial stress. The smartest way to consolidate debt is to find the type of consolidation that fits your financial situation and accomplishes your primary goal. Look at each available option and weigh your choices, finding the best fit.

You generally qualify for debt relief after determining that other options are not available, such as a consolidation loan or paying off your debts strategically through a snowball debt paydown. If you need help, don’t be afraid to seek it. Debt relief programs are not judging you based on your credit score. They will want to know if you are in a financial hardship

Debt consolidation loans can  have rates as low as 3.99% APR and up to  35.99% APR. The higher the interest rate the less likely that you have debt with an even higher rate that would make sense to consolidate. To get the lowest rates in the marketplaces, you need excellent credit.

APR is the yearly rate that lenders charge you to borrow money. APRs include the base interest rate of your loan plus all the fees that a lender charges you.  

The purpose of a debt consolidation loan is to pay off existing debt. There is a risk you might run up new debt on top of the loan that consolidated your old debt, leaving yourself in a bigger hole. There is also the risk that you might not use the new loan to pay off old debt, using the funds for some other purpose other than to consolidate debt. You can avoid that from happening if you work with a lender that pays your debts off directly to stay in sight of your goals.