A debt consolidation loan allows you to consolidate your debts into one loan with one monthly payment. A debt consolidation loan will reduce your debt interest and make it easier to pay off the debt faster. Because you only need one monthly payment, it can make it easier to pay down your debt.
Your credit score is a major factor in debt consolidation loans’ availability and interest rates. The higher your score, the more options available to you and the lower the interest rate you’ll pay.
Is it a good idea to consolidate debt?
Consolidating debt can provide a financial lifeline to those enslaved by high-interest debt. It is the first step towards paying down debt.
If you can get a consolidation loan with a lower interest than your combined rates on all your debts and continue making your monthly payments, a debt consolidation loan may be a good option.
Credit consolidation loans offer lower interest rates than credit cards, and you can budget for one predictable monthly payment based on your credit score. According to the Federal Reserve, for example, credit cards had an average interest rate of 14.75% for the first quarter of 2021, while personal loans averaged 9.46% for that period.
Does a debt consolidation loan impact my credit score?
As with all forms of credit, a consolidation loan for debt will affect your credit score as soon as you apply and when you pay it off.
Lenders will usually request a credit check when applying for a consolidation loan. This can lower your credit score by a few points. Your credit score can be affected if you take out loans to consolidate credit card debt but then carry large amounts on the cards while you repay the loan.
If the loan can put you in a better financial position by allowing you to make more manageable monthly payments — which accounts for around 35% of your FICO score — then borrowing the loan and taking a short-term credit rating dip may make sense.
Do I qualify for a debt consolidation loan?
Credit score and credit history are key factors in your ability to qualify for a consolidation loan. Borrowers who have good credit (or better) (690 on the FICO score scale), low debt, and high incomes are more likely to be approved for debt consolidation loans at lower rates. There is a wide selection of lenders that will lend to them. Lenders view those with poor credit as more risky (300-689 on the FICO scale), and they may not approve consolidation loans to these borrowers.
How do I get a debt consolidation loan?
You should make a list of all your debts and the monthly payments you wish to consolidate. The amount of any debt consolidation loan you take out should be sufficient to pay these debts. Also, the monthly payment amount and interest rate should be lower than your current payments. You should ensure that the loan payment is within your budget. A debt consolidation loan will not be of any benefit if you end up paying more than your budget.
