What is a personal debt consolidation loan?
A debt consolidation loan is a specialized personal loan that you take out specifically for the purpose of paying off credit cards and other unsecured debts. With good credit, you can qualify for the loan at a low interest rate and the funds are disbursed to pay off high interest rate debt.
What’s the benefit of a getting a loan to consolidate?
- You can consolidate credit cards into one payment
- It can significantly reduce the interest rate applied to your debt
- It pays off your debt in fixed payments that are easy to manage
- You can also pay off debts in collection, including medical debt
How does a debt consolidation loan work?
- You apply for a personal consolidation loan for an amount that covers the total debt you want to pay off.
- You select a term based on the monthly payments you can afford.
- The underwriter reviews your credit and debts; loan approval and rate will be determined based on your credit score and debt-to-income ratio.
- You will usually have to provide a list of the debts and current totals that will be paid.
- Once you’re approved, funds are usually disbursed directly to each of your creditors.
- This zeros out your balances, leaving only the fixed payment loan to be repaid.
Important Notes about Debt Consolidation Loans
First, keep in mind that this debt solution is more effective with better credit. If you don’t have good credit, you either won’t get approved or you won’t be able to qualify at an interest rate that provides the cost savings and payoff advantages that you need. The interest rate should be no higher than 10% to provide a benefit.
It’s also important to note that you want to ask for the shortest term you can afford. The longer you set the term, the lower the monthly payments will be. However, this increases total interest charges. If you can’t afford a term of 5 years or less (60 payments) then you should look into other solutions.
Finally, make sure to get a loan with no penalties for early repayment. If you have the funds to pay off the loan sooner, you want to be able to do so without penalties. Otherwise, you’re effectively restricting debt repayment in a way that it wasn’t when the balances were on your credit cards.