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What is a debt consolidation Loan?

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What Is a Debt Consolidation Loan?

An debt consolidation loan will combine your current debts into one with a lower rate of interest and a shorter time frame to payoff.

Updated on Dec 20, 2022.

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A is a loan that you can use to consolidate the debts you have already incurred into a single debt with just one monthly installment. A debt consolidation loan will lower the amount of interest you owe on the debt and help you pay it off faster. It also makes paying down debt simpler, since you will only have one monthly installment to consider when you budget.

The availability and interest rates for debt consolidation loans depend largely on your individual credit score. The better your score, the greater choices you’ll have, and the less interest you’ll pay.

What are the ways debt consolidation loans function?

Consolidation loans help you pay off your current debts with an amount in one lump. The loan amounts typically range from $1000 to $50,000 and repayment terms of between two and seven years.

Let’s take an example. For instance, suppose that you own four credit cards, each of which has a $5,000 balance. In lieu of making regular payments for each credit card, you take out the debt consolidation loan worth $20,000 and then apply that money for the payment of your credit card debts. You’re then left with one monthly installment on your new loan.

Pros and cons of debt consolidation loans

Debt consolidation loans can be lifesaver for those who are drowning in high-interest debt, since they typically offer lower interest rates than most credit cards, depending upon your credit rating.

For instance, the average interest rate on credit cards in this third quarter was 18.43 percent, while the average interest rate on personal loans for two years loan for the same time period was 10.16 percent, according to the Federal Reserve.

You can save money on interest, and you could also apply those saving to the loan, helping to pay off debt even quicker. Consolidated debt may also be easier to manage, since you’re only keeping track of a single, set monthly repayment.

However, debt consolidation doesn’t come without its cons. Borrowers with bad credit (629 credit score or less) may not qualify for a lower interest rate than the ones on their current loans. If you are eligible but you have to be on track with your monthly payment. If you’re in debt you could be assessed a late fee and your missed payment could be reported to the credit agencies, affecting the credit rating.

Consolidating won’t fix the habitual overspending. It can even increase the problem because your credit card are freed up.

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Do debt-consolidation loans an excellent idea?

An credit consolidation loan is generally recommended if you can get one that has a lower per cent rate than rate of all your current debts, and also pay the monthly installments.

Use NerdWallet’s tools to plug in your existing debts and credit score to evaluate your options for consolidation. It is also possible to calculate your potential savings by taking out a credit consolidation loan.

Do debt consolidation loans hurt your credit score?

As with all forms of credit such as one debt consolidation loan will have an impact upon your credit rating after you apply and as you pay it off.

If you’re applying for a debt consolidation loan, lenders usually require an examination of your credit report, which could temporarily reduce your credit score by a few points. If you take advantage of these loans for the purpose of paying off credit card debt but you carry huge balances on these cards after paying off the loan the credit score is likely to be affected.

However you can benefit should you are able to prove that the loan can put you in a more favorable position by enabling more manageable payments which you can make every month on time -which is more than three-quarters of credit worthit is possible that using the loan as well as a short-term credit rating dip could make sense in the long run.

What are the requirements to be eligible for an debt consolidation loan

The likelihood of being able to get the debt consolidation loan is dependent on your credit score and history. People with excellent or good credit (690 credit score or greater), little debt and high incomes usually qualify for the lowest rates for debt consolidation loans and have a wider selection of lenders to pick from.

Borrowers with bad to fair credit (300 to 689 credit score) are viewed as riskier by lenders and may only be eligible to receive debt consolidation loans from lenders that target those with bad credit.

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The best way to learn whether you’re eligible for a debt consolidation loan is to look through the . One of the advantages of the pre-qualification procedure is that it uses a soft credit pull and will give you an idea about the loans and rates that are available to you without hurting your credit score.

You can and evaluate loans from lenders online.

How do I find a debt consolidation loan

Create a list of your debts as well as monthly payments that you want to reduce or consolidate. The credit consolidation loan you take on should be large enough to pay off these debts and the loan’s interest rate and monthly payment amount must be less than the amount you’re currently paying.

Be sure that the loan amount is within your budget. A debt consolidation loan will not be beneficial if it ends up putting you in debt.

Find out your credit score as well as what loan amount and rate you’d like to pay to get, then look for and compare loans offered to you. Look over the options, and each of which offer different advantages.

See if you pre-qualify for an individual loan and not impacting your credit score

Simply answer a few questions to receive personalized rates from a variety of lenders.

The amount of the loan

on NerdWallet

Other ways to consolidate debt

typically, it involves getting generally involves getting a loan, but other options include refinancing with an interest-free credit card to transfer balances using the equity in your home or the funds from your 401(k) savings.

Refinancing your debt with a could be beneficial for less significant amounts of debt that you believe you’ll be able to pay off during the period of promotional interest that is no-interest, which usually lasts between 15 and 21 years. You’ll probably need to have good or exceptional credit score to be eligible.

If you own a property it is possible to borrow against your home’s equity to pay off debts. and may have lower interest rates, but if you stop making payments and do not make payments, you could lose your home.

Many people decide to take out a loan from their employer-sponsored retirement account, known as a . This type of loan usually grants you the chance to take advantage of lower interest rates but it also cuts into your retirement funds.

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About the author: Jackie Veling covers personal loans for NerdWallet.

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