What is a debt consolidation Loan?

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What is a debt consolidation Loan?
A debt consolidation loan will combine your current debts into one with a lower rate of interest and shorter time to payoff.


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The term "a" refers to a loan that is used to consolidate your debts from the past into one only one monthly payment. A debt consolidation loan can reduce the total amount of interest due on your debt, and also help to pay it off more quickly. This can also make paying down debt simpler, because you'll only have one monthly payment to account for in your budget.
The rates and options of debt consolidation loans largely depend on your individual credit score. The better your score, the more options you're offered and the less interest you'll pay.
How do debt consolidation loans function?
Consolidation loans work by paying off your current debts with a lump sum. Loan amounts usually range between $1,000 and $50,000, with repayment terms ranging from two to seven years.
As an example, let's say you have four credit cards each with a $5,000 balance. Instead of making monthly payments on each credit card, you take out the debt consolidation loan for $20,000 and apply that cash to pay off your credit card debts. There's only one monthly installment for your new loan.
Pros and negatives of debt consolidation loans
Debt consolidation loans can be a lifeline for those who are drowning in high-interest debt, since they typically have lower interest rates than most credit cards, based on your credit score.
For example, the average interest rate on credit cards for the third quarter of 2022 was 18.43 percent, while the average interest rate for personal loans for two years loan for the same time period was 10.16%, according to the Federal Reserve.
You can save money on interest costs, and you could also apply those money to pay off your loan, helping you get out of debt much faster. Consolidated debt can also be more manageable, as you're only managing a single, regular monthly installment.
However, debt consolidation doesn't come without its drawbacks. For those with poor credit (629 credit score or less) might not be eligible for an interest rate lower than the one they have on current debts. If you're eligible but you have to be on track with your monthly installment. If you are in debt you could be assessed a late fee and the missed payment may be reported to credit agencies, damaging the credit rating.
Consolidating also won't solve habitual spending. It could make it worse because your credit cards are freed up.
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Do debt-consolidation loans an excellent idea?
A credit consolidation loan is generally recommended when you can find one with a lower annual percentage rate than the combined rate on the debts you have and pay your monthly bills.
It is possible to use NerdWallet's tool to input your current debts and credit score to evaluate your options for consolidation. You can also calculate the savings you could make through the credit consolidation loan.
Do debt consolidation loans hurt your credit score?
Like most forms of credit like other types of credit, one debt consolidation loan will have an effect on your credit score after you apply and as you pay it off.
If you are applying for the debt consolidation loan the lenders typically require an accurate check of your credit report, which may temporarily lower your credit score a few points. In the event that you take the loans for the purpose of paying off debts on credit cards but you carry high balances on the credit cards as you pay off the loan, your credit score could drop.
But you can benefit if the loan puts you in a better position in that it makes payments more manageable that you can make punctually each monthwhich is more than three-quarters of credit worthand then making the loan and a temporary credit score dip might be beneficial over the long haul.
What are the requirements to be eligible for a debt consolidation loan
Your ability to qualify for a debt consolidation loan is dependent upon your credit rating as well as your credit history. Borrowers with good or excellent credit (690 credit score or higher), little debt and high incomes usually have the best rates for the debt consolidation loans and have a wider range of lenders to choose from.
People with fair or poor credit (300 to 689 credit score) are viewed as riskier by lenders and may only be eligible in debt consolidating loans by lenders who are geared towards those with bad credit.
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The best method to determine whether you're eligible for a debt consolidation loan is to review the . One of the benefits of the pre-qualification procedure is that it makes use of an easy credit pull that gives you a sense of loans and rates that are available to you without hurting your credit score.
You can also examine loans from online lenders.
How to find a debt consolidation loan
Make a list of all of your debts and monthly payments that you would like to reduce or consolidate. A debt consolidation loan you accept is required to cover the debts you have, and the loan's rate of interest and the monthly amount of your payment should be less than the amount is currently being paid.
Check that the loan payment fits within your budget. The debt consolidation loan will not be beneficial when it leads to putting you in a deeper debt.
Find out your credit score as well as determine the loan amount and rate you'd like to pay to get, then look for and compare loans that are available. Look over the options, and each of which offer various benefits.
Check if you are pre-qualified for a personal loan - without affecting your credit score
Answer a few simple questions to receive personalized rates from a variety of lenders.


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Alternative ways to consolidate debt
typically, it involves getting a loan, but other options include refinancing your loan with the 0% interest balance transfer credit card using the equity in your home or your 401(k) money to save.
Refinancing your debt with a can be useful for smaller amounts of debt that you believe you can pay off during the promotional period of no interest, which usually lasts between 15 and 21 years. It is likely that you will need excellent or exceptional credit score to be eligible.
If you have a house it is possible to borrow against your home's equity to pay off your debts. It could also have lower interest rates, however should you not make payments and do not make payments, you could lose your home.
Some people choose to get a loan from their retirement account, also known as a . This type of loan usually grants you access to lower interest rates, but 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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