Between credit cards, retail card balances and even medical bills, it can be a challenge to keep up with multiple streams of debt. A personal loan for debt consolidation can make it easier to manage your monthly payments and stay on top of your finances. You might even qualify for a lower interest rate that proves easier on your wallet.
Ready to get started? Follow this guide to find the best personal loans for debt consolidation.
Best Personal Loans for Debt Consolidation
Personal loans allow you to consolidate all your debt into a single monthly payment. This can help you keep better track of your finances and give you an accurate picture of your future expenses. And there’s always the possibility of securing a personal loan at a lower interest rate than what you’re currently paying. In this case, you could save hundreds of dollars and pay off your debt faster.
Many personal loans allow you to choose the timeframe on your loan. Most have a limit of 5 years. A longer loan term can help lower your monthly payments, although you will end up paying more in interest.
Either way, many people are successful in lowering their monthly payments and getting out of debt with a personal loan. There’s also the added bonus of improving your credit score. If you make all your monthly payments on time, your score will get a boost.
You’ll never know what kind of rates you’ll qualify for until you reach out to lenders. It’s a good idea to talk to several lenders and shop around for different rates before you agree to take out a personal loan. Take a look at our picks for the best personal loans for debt consolidation.
Types of Personal Loans for Debt Consolidation
Most personal loans are unsecured, fixed-rate loans. Although different lenders may offer you different kinds of loans depending on your financial situation and credit report. It’s a good idea to understand the different kinds of loans available. Take a look at some features of the most common types of loans.
A secured loan is a personal loan that is guaranteed by collateral. Collateral is any asset you own that has significant value, including your home, car, jewelry, antiques, an investment portfolio or even art. It’s important that you are the owner of the asset and that its value is large enough to cover the amount you’re borrowing.
Secured loans are common options for people that have no credit history or low credit scores. However, they can become dangerous if you are unable to fulfill the terms of the loan. For example, many people use their homes as collateral for a secured loan. If they are unable to pay back the money, the lender has the right to seize ownership of the home.
Unsecured loans don’t require any collateral in exchange for the loan amount. Lenders will determine whether you are eligible based on your financial criteria such as your credit score and income level.
If your credit score is less than good or if you have a large amount of debt, you may have a difficult time getting approved. On the other hand, the higher your credit score and the healthier your finances are, the more likely you are to be approved on favorable terms.
Interest rates on fixed-rate loans are the same throughout the entire duration of the loan. Unlike variable-rate loans or adjustable-rate loans, you won’t have to worry about your rate going up.
Most auto loans, student loans and mortgages are fixed-rate loans. Fixed-rate loans give you a good understanding of how much your future payments will be. Unlike variable-rate loans, whose interest rates can change over time.
Fixed-rate loans are great if you lock in your loan for a low-interest rate. If interest rates go down over time, you may decide to refinance your loan at a lower rate. Most personal loans have timeframes that range from a few months to a few years. You are less likely to have to refinance your personal loan than you if you were taking out student loans or a mortgage.
Personal Loan Requirements and Criteria
Personal loans for debt consolidation work best if you are struggling with credit card debt, medical bills, retail credit cards, payday loans or other personal loans. The interest rate, time frame and other terms you receive will depend on your personal financial information. Your credit report is a major influence on the type of loan you will be offered.
If you have fair or poor credit, you’ll have to accept higher interest-rates than someone who has good or excellent credit. If your credit is poor or if you have no credit history, it’s possible to be denied altogether. If this happens, don’t be discouraged and keep trying out different lenders. It might also be a good idea to look into credit builder loans.
While your credit score is important, it’s not the only factor that influences your ability to qualify for a personal loan. There are other components lenders look into to understand your overall financial health. Your chances of getting approved and receiving more favorable terms are better if you’re doing well in 1 of the following areas:
- Steady income
- Debt-to-income ratio
- Payment history
- U.S. citizen or legal resident
- Minimum age (usually 18 but varies in different states)
Personal Loan Considerations
Although personal loans can be a great way to consolidate your debt, they are not for everyone. Most personal loans cap out a couple of tens of thousands of dollars at the most. If you have a high amount of debt or owe more money than you can reasonably pay back, you might not qualify for a personal loan and should look into other options like bankruptcy.
It’s important to verify that your creditors will allow you to consolidate your debt with a personal loan. Some creditors may not allow you to use a personal loan to pay off your debt. Some might even charge you penalties for paying off your debt early. There’s also no guarantee that your monthly payments will be lower. It’s best to consult with your creditors and shop around for different lenders to understand what your options are.
Whatever you do, don’t resort to predatory loans. Predatory loans may seem like an easy way to get cash fast, especially if you don’t have the best credit.
These loans exploit borrowers with unfair or abusive terms. In some cases, lenders may try to coerce, force or hide important information from you. You could face high-interest rates, excessive fees and potentially damage your credit score.
Personal Loans vs. Credit Cards
Some people might opt for a balance transfer credit card instead of a personal loan. These credit cards can have intro 0% APY offers for up to several months to a couple of years. These cards can be a viable option for debt consolidation but only if you can pay off the balance in full and by the time the promotional period ends.
Once the 0% APY period is over, you’ll be paying higher interest on a credit card than you would on a personal loan. You’ll also need to make sure you don’t rack up additional charges on your credit card balance.
Doing this would make it more difficult to pay off the money you owe. Unlike credit cards, personal loans have the added benefit of fixed-payments, so you’ll always know what your future payments are going to be.
Borrow Money for Debt Consolidation
Taking out a personal loan can be a great way to consolidate debt. However, personal loans are not necessarily an easy fix. You’ll still need to work hard to make your payments on-time and curtail unnecessary spending.
Remember that a personal loan for debt consolidation is only the 1st step. It’s up to you to make long-lasting financial changes.