Debt consolidation loans let borrowers take out a single loan that covers the outstanding balance on some or all of their unsecured loans. The consolidation loan is then used to pay off each of the individual loans so the borrower is only responsible for a single monthly debt payment. This results in a more streamlined repayment process and can give the borrower access to a lower overall interest rate.
When evaluating loan applications, lenders generally look for a credit score between 580 and 620. However, lenders also consider factors like the applicant’s ability to repay the loan. Qualifying for a debt consolidation loan can be more difficult if you have bad credit but it’s still possible—especially if you’re open to getting a secured loan or having a co-signer.
What Is a Debt Consolidation Loan?
A debt consolidation loan is a type of personal or business loan that enables borrowers to take out a loan for a period of two to seven years. Borrowers can use these loans to pay off multiple individual loans—thus, consolidating them into a single loan with only one monthly payment. Consolidation loan interest rates range from 5% to 36% so, depending on their creditworthiness, a borrower may also be able to lower their overall interest payment. But if you only qualify for an interest rate on the high end of the range, getting a consolidation loan may not lead to any savings.
Types of Debt To Consolidate
In general, a borrower can consolidate loans or credit lines that are not secured by a home or otherwise collateralized. Common types of debt to consolidate include but are not limited to:
- Credit card balances
- Student loans
- Unsecured personal loans and personal lines of credit
- Payday loans
- Income taxes
- Hospital and other medical bills
- Cell phone and utility bills
- Court judgments, not currently under enforcement through garnishment or other collection remedies
How to Get a Debt Consolidation Loan
If you think a debt consolidation loan is a good fit for you, follow these steps:
1. Determine Your Credit Score
Before you apply for a debt consolidation loan, check your credit score on a free site or with a reporting service through your credit card company. Lenders generally look for a credit score between 580 and 620 when extending consolidation loans, so it’s best to know your score before you apply—especially if you have a weak credit history.
2. Boost Your Credit Score
For those with a poor credit score, boosting your credit can improve your chances of qualifying for a debt consolidation loan. However, mending credit can be a long, difficult and sometimes confusing process. To increase your credit score in the short term, focus on paying your bills on time, keeping current accounts open and limiting hard inquiries on your credit report. You can also dispute any inaccurate information on your credit report or use a tool like Experian Boost to get credit for utility and cell phone payments.
Keep in mind, though, that Experian Boost only impacts your FICO Score 8, and while that scoring model is the most widely used, some lenders might use a different score type or model to extend you a consolidation loan. So Experian Boost might not help in all circumstances.
3. Shop for Lenders and Get Pre-qualified
Once you know your credit score, start shopping for a lender. If you have an existing relationship with a local bank or credit union, start there; but keep in mind that they may have more rigorous qualifications. Then, research online lenders and compare factors like interest rates, loan terms and lender fees.
When reviewing your application for a debt consolidation loan, a lender will run a hard credit check that can negatively impact your credit score. However, lenders can pre-qualify you for a loan by running a soft credit check, which will not show up on your credit report.
If you’re afraid your credit score is too low to get approved for a consolidation loan, consider getting pre-qualified by several lenders. This can help you determine the likelihood of getting approved for a loan. Then you can compare interest rates and other terms to choose the best debt consolidation loan—and lender—for you.
4. Choose a Secured Loan
If a borrower isn’t happy with the options available following the pre-qualification process, they may increase their chances of qualifying for a consolidation loan by applying for a secured loan. Secured loans often come with lower interest rates and may be easier to obtain because they are collateralized by the borrower’s home or other valuable assets like investments. However, if your score is high enough to qualify for an unsecured loan, it’s best not to pledge collateral unless you’re confident in your ability to make on-time payments. If you fall behind on payments, you could lose the asset you’ve used as collateral.
5. Find a Co-signer
Likewise, loan applicants with poor credit can access better lending terms by having someone with strong credit co-sign on the loan. This means that if the borrower fails to make payments on the consolidation loan, the co-signer will be on the hook for the outstanding balance. In general, lenders look for co-signers who have good or excellent credit scores and who have enough income to cover payments on the co-signed loan and their own debt service.
Qualifying for a Debt Consolidation Loan with Bad Credit
If you can’t qualify for a debt consolidation loan because of your credit score, consider strengthening your application by improving your debt-to-income ratio. This can be done by increasing your income—with a side hustle or otherwise—or by paying off some of your smaller, more manageable debts.
Secured loans may also be more accessible to applicants with bad credit because they reduce the lender’s risk and often come with lower interest rates. Those without home equity or other valuable collateral may be better served by having someone with better credit co-sign on the consolidation loan. If a secured loan or co-signer is not possible, borrowers with bad credit can focus their energies on do-it-yourself debt repayment using the debt snowball or debt avalanche methods.
Where to Get a Debt Consolidation Loan for Bad Credit
Debt consolidation loans are available from a number of traditional and online lenders. Traditional lenders like credit unions and banks generally offer lower interest rates. Online lenders, in contrast, provide borrowers access to faster closing times and lower qualification requirements, making them ideal for those with bad credit. However, these loans typically come with higher interest rates so it’s important to shop around.
Who a Debt Consolidation Loan Is Right For
Getting a debt consolidation loan is a great way for some people to simplify their monthly payments and reduce overall interest charges. However, for borrowers with poor credit, inconsistent income or poor spending habits, a debt consolidation loan may not be the best solution.
Debt consolidation might be right for you if:
- Your credit score is high enough to qualify for a low-interest loan
- You have enough home equity to utilize your house as collateral for a secured loan
- Your monthly debt service totals 40% or less of your monthly income
- You are already taking steps to improve your finances and reduce spending
- Your monthly cash flow consistently exceeds your monthly debt payments
How to Eliminate Debt with a Consolidation Loan
Debt consolidation loans can help borrowers eliminate debt by streamlining payments and—in some cases—reducing interest rates. However, to effectively eliminate your debt with a debt consolidation loan you must also take steps to improve your finances and pay down the consolidated loan.
This may include making and sticking to a budget so you consistently spend less than you earn. Borrowers who are trying to eliminate debt with a consolidation loan should also stop adding to their debt by pausing their credit card use and keeping monthly balances low.
Finally, debt consolidation loans are most effective when the borrower maintains open communication with the lender—so if you’re struggling to make payments, let your lender know as soon as you can.
Debt Consolidation Loan Costs
Debt consolidation loans typically come with an interest rate between 5% and 36% that varies based on the applicant’s creditworthiness, income and debt-to-income ratio. Depending on your outstanding loans, a debt consolidation loan may have a lower interest rate than you’re currently paying—but it may be higher if you have a low credit score.
In addition to paying interest, borrowers may encounter annual lender fees as well as costs associated with loan origination, balance transfers and closing. Additional costs of a debt consolidation loan may include:
- Loan origination fees
- Balance transfer fees between 3% and 5% of the total balance
- Closing costs
- Annual fees
Pros and Cons of Debt Consolidation Loans
The pros of debt consolidation loans are:
- Reduce multiple debts to one monthly payment
- Lower overall interest rate
- Improve your credit with on-time payments
- Lower total monthly payment by increasing the loan term
- Can shorten the amount of time it takes to pay off certain types of debt, like credit cards
The cons of debt consolidation loans are:
- Depending on the lender, you may have to cover high upfront and/or annual fees
- If you have a low credit score, it may be difficult to get a low interest rate
- Consolidation alone doesn’t fix poor financial habits and is not a guaranteed way to get out of debt
Alternatives to Debt Consolidation Loans
If you have a low credit score, it can be difficult to qualify for consolidation loan terms that meet your needs. If you’re struggling to find acceptable loan terms, consider these alternative approaches to debt consolidation:
- Debt management plan. A debt management plan lets borrowers consolidate credit card balances into a single debt—much like a consolidation loan. These plans usually span three to five years and are offered by credit counseling agencies.
- Home equity loan. A home equity loan is a second mortgage paid out in a lump sum that can let a homeowner consolidate their other debts. This can be a good consolidation alternative for borrowers with at least 15% to 20% equity in their home.
- DIY debt payoff options. Borrowers with low credit scores may not have many debt consolidation options and it may become necessary to pay off their debts without a consolidation loan. There are several ways to wipe out debt on your own but the debt snowball and debt avalanche methods are the most popular.
3 credit habits that you need to break
Are you using your credit card responsibly? Or do you have a few bad habits? Take a look at three common bad habits that people have with their credit cards and the best ways to stop doing them.
Habit 1: Pushing the limits
The first bad credit habit is pushing your outstanding balance close to its limit. What’s wrong with that? The first problem is that you’re giving yourself a larger debt load to contend with every month — one that accumulates interest the longer that it sits. It could be very difficult to pay down, and it could even lead to you maxing out your card.
The second problem with this habit is that it leaves you vulnerable to emergencies. You’ve taken up the majority of your available credit, so you can’t depend on it for unexpected payments. What if you need to pay for an urgent repair and there’s not enough room on your card? What can you do?
To avoid that difficult situation, you could apply for an online loan to help you cover the emergency costs and move forward. See how you can apply for an online loan in Ohio when you have no other safety nets to fall back on. It’s important that you only turn to this solution when you’re dealing with an emergency. It’s not for everyday purchases or small budgeting mistakes.
In the meantime, you should try your best to keep your credit utilization at 30% or lower — this means that your balance should be below the halfway point of your limit.
Habit 2: Paying the minimum
You pay your credit card bills on time, but you only give the minimum payment. While this habit can stop you from racking up late fees and penalties, it can still get you into hot water if you’re not careful.
Only paying the minimum for your bill will make it very difficult for you to whittle down the balance, especially when you’re continuing to charge expenses on your card. You’re only taking $20-$25 off a growing pile.
So, what can you do? If you’re paying this amount by choice, stop it — you’re only making things harder for yourself down the line. If you’re paying this amount because you don’t have any more funds, look at your budget to see whether you can cut your monthly costs to get more savings and use them to tackle your balance.
Habit 3: Using it for every single expense
You don’t need to put every single expense on your credit card. Your morning coffee? Your afternoon snack? Putting these small, everyday expenses on your card is a habit that can make your balance climb quickly.
You also don’t want to put some very important expenses on there, like mortgage payments. For one, these payments are large and will take up a significant amount of your credit. Secondly, if you need to use a credit card to make these payments on time, you need to reinvestigate your budget to see whether you can actually afford your living space.
So, what you should you do? Use a debit card, cash or checks to pay for the items above. Only put expenses on your credit card that you’re positive you can pay off in a reasonable timeframe.
Don’t let these bad habits drag you down and get you into financial trouble. Break them now, before it’s too late.
Free credit reports have been extended; here’s why it’s important to check yours regularly
Typically, you’d be able to check your credit report — at least for free — just once annually through each of the three major credit reporting agencies. But thanks to the coronavirus pandemic, credit reports are now more accessible than ever.
Credit reporting companies Equifax, Experian and TransUnion are all offering free credit reports weekly through April 20, 2022.
The move means better insight into your financial health during what, for most, is an economically challenging time. According to experts, it might also be a time that’s ripe for at-risk personal information and identity theft, too — even more reason consumers should be checking their credit on the regular.
Have you checked your annual credit lately? If not, here’s what you need to know about these free nationwide credit reports and how to get them. If you’re not sure where you fit on the credit score spectrum, you may want to start using a credit monitoring service to track changes to your credit score. Credible can get you set up with a free service today.
Free credit reports for all?
The nation’s three credit bureaus initially started offering free weekly credit reporting last year, just after the pandemic began. In early March, they announced they’d extended the offer for another year, this time through April 20, 2022.
To request your free credit reports and access copies, you can go to AnnualCreditReport.com and provide some basic information to verify your identity (things like your date of birth, Social Security Number, and address).
Once your report is ready, you should see a detailed list of all open and closed accounts in your name, your payment history, recent credit activity and more.
Protect yourself from identity theft
There are many reasons why checking your credit activity is important, but chief among them? That’d be the prevalence of data breaches in today’s world — not to mention the risk of identity theft they come with.
“In the past, it was perfectly acceptable for people to check their credit history once a year, but now with security breaches happening on a regular basis, consumers should be monitoring their credit more closely than ever,” said Clint Lotz, president and founder of TrackStar.ai, a predictive credit technology firm.
Lotz said the Equifax breach — which exposed over 147 million Americans’ personal information in mid-July 2017 — is the perfect example of why watching your credit report is important as far as identity theft protection goes. The pandemic, he said, adds an extra layer of risk to things.
“It took them [Equifax] months before they even realized they had been hacked, and considering that they hold files on hundreds of millions of Americans, it’s fair to say that many identities were stolen by the time they caught up to it,” Lotz said. “With many of us worrying about very serious issues not related to our credit, it’s a prime time for that stolen data to be put to work by bad actors in slow, methodical ways and in the hopes that nobody notices it.”
More reasons to check your credit
Checking your credit health often isn’t just good for detecting fraud alerts and to protect your identity, though. You can also monitor your report for errors — things like inaccurately reported late payments, for example — and then dispute those with the credit bureau.
If the error gets corrected, it could improve your credit score and make a jump from bad credit to a FICO score that’s more favorable. Not sure of your credit score? Head to Credible to check your score without negatively impacting it.
You can also use your credit reports and scores to monitor your financial habits — like the timeliness of your payments or how much debt you have left to pay off. Both of these factors can play a big role in your score, as well as how likely you are to get approved for loans, credit cards and other items.
“If you’re taking out a loan, getting insurance or even applying for a new job, checking your credit will allow you to see an overview of what would be seen by others looking at your credit,” said Leslie Tayne, a debt relief attorney with the Tayne Law Group. “Staying up-to-date on your credit reports and information allows you to know exactly where you need to improve.”
Want to be sure your credit is stellar before applying for a loan or insurance policy? Consider Credible’s partner product Experian Boost, which lets you use positive payment history on utilities, streaming and other bills to improve your credit score.
Set up a monitoring service, too
Though checking your credit reports manually is smart, you should also consider signing up for a credit monitoring service. These consumer financial services check your credit information and score regularly and alert you of any changes.
If you’re interested in monitoring your credit or improving your score, head to Credible and learn more about how Experian can help. You can also use Experian Boost to get credit for on-time bill payments.
Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.
Do Personal Loans Have Penalty APRs?
Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.
The Blue Cash Preferred® Card from American Express, for instance, has a 13.99% to 23.99% variable APR, but the penalty APR is a variable 29.99% (see rates and fees). Penalty APRs usually last for at least six months, but card issuers often reserve the right to extend them — especially when you continue making late payments. A look at the terms for the Citi® Double Cash Card show us that the “penalty APR may apply indefinitely.”
Penalty APRs are certainly not a trap you want to fall into, but it’s not something you usually have to worry about if you have a personal loan. Personal loan lenders can, however, charge late fees upwards of $39 per late payment. Whether your loan charges late fees all depends on how good of a loan you qualify for, and that comes down to your credit score, borrowing history and ability to make your payments.
Personal loans also tend to charge lower interest rates than credit cards, too. The average personal loan interest rate for two-year loans is currently 9.46% according to Q1 2021 data from the Federal Reserve, compared to 15.91% for credit cards.
Typically, interest rates for personal loans range between roughly 2.49% and 24%, but personal loans for applicants with bad credit can come with even higher APR — so do your research before applying.
Other common personal loan fees include:
- Interest: The monthly charge you pay to borrow money
- Origination fee: A one-time upfront charge that your lender subtracts from your loan to pay for administration and processing costs
- Late fee: A one-time fee charged for each payment that you fail to make by the due date or within your grace period
- Early payoff penalty: A fee incurred when you pay off your balance faster than planned (because the lender misses out on months of expected interest payments)
As you can see, personal loans can be costly, even without a penalty APR. It’s obviously best to avoid paying extra fees whenever possible. That’s easier to do when you have a good to excellent credit score, since you’ll qualify for better loan options.
None of the loans on our best personal loan list charge origination fees or early payoff penalties, but some may charge late fees.
Find the best personal loans
For rates and fees of the Blue Cash Preferred® Card from American Express, click here.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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