What is a Debt Consolidation Loan?

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What is a debt consolidation Loan?
The debt consolidation loan consolidates your debts into one with a lower rate of interest and a shorter period to pay off.


Last updated on Dec 20, 2022.

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A is a loan that you can use to consolidate your existing debts into one just one monthly installment. The use of a debt consolidation loan will lower the amount of interest you owe on your debt, and also help to pay it off more quickly. It can also make repayment easier since you will only have one monthly payment to keep track of within your financial plan.
The availability and interest rates for debt consolidation loans heavily depend on your credit score. The better your score, the greater options you have and the lower interest you'll pay.
How do debt consolidation loans function?
Debt consolidation loans work by paying off your current debts with a lump sum. The amount of loans typically ranges between $1,000 and $50,000, with repayment terms of two to seven years.
As an example, let's say there are four cards on your credit, each of which has the balance of $5,000. Instead of making monthly installments on each credit card, you get an installment loan of $20,000 and use that money for the payment of your credit cards. There's only one payment per month for your new loan.
Pros and cons of debt consolidation loans
Debt consolidation loans can be a lifeline for those who are drowning into high-interest debts, as they typically have lower interest rates than the majority of credit cards, based the credit scores of your.
For example, the average interest rate for credit cards in the 3rd quarter in 2022 stood at 18.43 percent, while the average interest rate for personal loans for two years loan for the same period was 10.16 percent, as per the Federal Reserve.
You'll save money on interest and can apply the saving to the loan which will help you pay off your debt even quicker. Consolidated debt may also be more manageable, as you're only keeping track of only one, regular monthly installment.
But it's not without its drawbacks. For those with poor credit (629 credit score or less) aren't likely to be eligible for a lower interest rate than those on their current credit cards. If you qualify however, you still need to make a monthly installment. If you are in debt, you may be assessed a late fee and the missed payment may be reported to credit reporting agencies further affecting the credit rating.
Consolidating also won't solve habitual spending. It may even increase the problem since your credit cards are freed up.
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Do debt-consolidation loans a good idea?
A consolidating debt loan is typically an excellent option when you can find one that has a lower per cent rate than total rate on your existing debts and make the monthly payments.
It is possible to use NerdWallet's tool to enter your existing credit score and your debts to determine your options for consolidation. It is also possible to calculate the savings you could make with the help of a loan for debt consolidating loan.
Do debt consolidation loans hurt your credit score?
Like most forms of credit, the debt consolidation loan can have an impact on your credit score when you apply and as you pay it back.
If you are applying for the debt consolidation loan lenders will typically request a hard pull of your credit file, which could temporarily reduce your credit score by a couple of points. In the event that you take these loans for the purpose of paying off debts on credit cards however, you end up with large balances on those cards again while you pay off the loan the credit score is likely to be affected.
But, it is a good thing if the loan can put you in a better position in that it makes payments more manageable that you can pay on time each month -that accounts for more than three-quarters of credit worthit is possible that taking the loan and a short-term credit score dip might make sense in the long term.
How to qualify for the debt consolidation loan
The likelihood of being able to get the debt consolidation loan is dependent upon your credit rating as well as your credit history. Creditors with excellent or excellent credit (690 credit score or more) with a low amount of debt and high earnings typically are eligible for the lowest interest rates for debt consolidation loans and also have a greater selection of lenders to pick from.
Borrowers with bad to fair credit (300 to 689 credit score) are considered riskier by lenders. They may not qualify to receive debt consolidation loans from lenders who target bad-credit borrowers.
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The best method to determine whether you're eligible in the debt consolidating loan is to go through the . One of the benefits of the pre-qualification procedure is that it makes use of a soft credit pull and provides you with a picture of the loans and rates available to you, without affecting your credit score.
You can examine loans from lenders online.
How do I find a debt consolidation loan
Make a list of all of your outstanding debts and monthly payments that you would like to reduce or consolidate. A consolidating debt loan you accept is required to pay off these debts and the interest rate and the monthly amount of your payment should be less than the amount is currently being paid.
Make sure the loan payment fits within your budget. A debt consolidation loan isn't a good idea when it leads to putting you in a deeper debt.
Know your credit score and determine the loan amount and rate you want Then, shop around and compare loans that are available. Look over the options, and each with different advantages.
Check if you are pre-qualified for an individual loan and it will not affect your credit score
Answer a few simple questions to receive personalized rate estimates from multiple lenders.


The amount of the loan
on NerdWallet








Another option to consolidate debt
It is usually typically involves getting a loan typically, however other options include refinancing your loan with an interest-free credit card for balance transfers using the equity of your home, or tapping into the funds from your 401(k) saving account.
The option of refinancing your debt using a is a good option for smaller amounts of debt that you believe you'll be able to pay off during the card's no-interest promotional period typically lasting 15 to 21 months. It is likely that you will need excellent or excellent credit to qualify.
If you have a home, you could also take advantage of the equity in your home to pay off your debts. It could also have lower interest rates. However, if you stop making payments and do not make payments, you could lose your home.
Some people choose to take out a loan from their retirement account, known as a . This type of loan usually grants you the chance to take advantage of lower interest rates, however it also eats into the retirement savings.
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About the author: Jackie Veling covers personal loans for NerdWallet.







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