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What is a debt consolidation Loan?

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What is a debt consolidation Loan?
A debt consolidation loan consolidates your debts into one, ideally with a lower rate of interest and a shorter period to pay off.


Updated on Dec 20, 2022.

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A is a loan that you can use to consolidate your existing debts into a single debt with only one monthly payment. The use of a debt consolidation loan can reduce the total amount of interest due on your debt, and also help you pay it off faster. This can also make the process of paying off debt easier, because you'll only have one monthly payment to account for within your financial plan.
The interest rates and availability for debt consolidation loans heavily depend on your individual credit score: The better your score, the more options you're offered and the less rates of interest you'll be charged.
What are the ways debt consolidation loans work?
Debt consolidation loans are used to pay off your current debts with an amount in one lump. The amount of loans typically ranges from $1000 to $50,000 and repayment terms of two to seven years.
Let's take an example. For instance, suppose you have four credit cards, each of which has an amount of $5,000. Instead of making monthly payments on each credit card, you get a debt consolidation loan for $20,000 and make use of the cash for the payment of your credit cards. Then you're left with just one monthly payment on the new loan.
Pros and cons of debt consolidation loans
Debt consolidation loans can be a lifeline for those sinking into high-interest debts, as they typically offer lower rates of interest than credit cards, contingent on your credit score.
For instance, the median interest rate on credit cards in the 3rd quarter in 2022 stood at 18.43%, 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 can apply the saving to the loan, helping you pay off your debt even quicker. Consolidated debt may also be more manageable, as you're only keeping track of a single, fixed monthly payment.
However, debt consolidation doesn't come without its cons. Borrowers with bad credit (629 credit score or lower) aren't likely to be eligible for an interest rate lower than the one they have on current credit cards. If you are eligible, you must still be on track with your monthly installment. If you fall behind you could be penalized for late payment, and the missed payment may be reported to the credit agencies, damaging the credit rating.
Consolidating also won't solve habitual overspending. It could cause more problems since your credit cards will be freed up again.
>> MORE:
Is debt consolidation loans an excellent idea?
A debt consolidation loan is generally a good idea to get one that has a lower per cent rate than combined rate on your existing debts and pay the monthly installments.
Use NerdWallet's tools to input your current credit score and your debts to determine your options for consolidation. It is also possible to calculate the savings you could make with the help of a credit consolidation loan.
Do debt consolidation loans hurt your credit score?
Like all types of credit like other types of credit, one debt consolidation loan can have an impact on your credit score when you apply and as you pay it back.
When you apply for the debt consolidation loan, lenders usually require an examination of your credit report which can temporarily knock down your credit score by a few points. If you take advantage of the loans in order to settle debts on credit cards however, you end up with high balances on the cards after paying off the loan and your credit score is likely to be affected.
But it is a good thing if the loan puts you in a more favorable position by enabling more manageable payments which you can make every month on time -that accounts for more than 1/3 of the credit scores you haveit is possible that taking the loan as well as a short-term credit score dip might be beneficial over the long haul.
What are the requirements to be eligible for the debt consolidation loan
Your ability to qualify for the debt consolidation loan depends primarily on your credit score and history. People with excellent or good credit (690 credit score or higher), little debt and high incomes usually qualify for the lowest rates for the debt consolidation loans and also have a greater selection of lenders to pick from.
People with fair or poor credit (300 to 689 credit score) are considered to be more risky by lenders and may only qualify to receive debt consolidation loans by lenders who are geared towards those with bad credit.
>> COMPARE:
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 process is that it makes use of a gentle credit pull, which provides you with a picture of the loans and rates that are available to you without hurting your credit score.
You can also evaluate loans from lenders online.
How to get a consolidation loan
Make a list of all of your debts and the monthly payments you wish to combine. The debt consolidation loan you accept should be large enough to cover the debts you have, and the loan's interest rate and monthly payment amount should be less than the amount are you currently paying.
Check that the loan payment is in your spending plan. A 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 interest rate you're looking for to get, then look around and compare loans offered to you. Take a look, and each of which offer distinct advantages.
See if you pre-qualify for an individual loan - without affecting your credit score
Simply answer a few questions to get your own rates from a variety of lenders.


Loan amount
on NerdWallet








Another option to consolidate debt
It is usually a loan, but other options include refinancing with an interest-free credit card to transfer balances, tapping into your home's equity or using your 401(k) money to save.
The option of refinancing your debt using a is a good option for smaller loans that you believe you'll be able to pay off during the period of promotional interest that is no-interest that typically lasts from between 15 and 21 months. You'll likely need good or exceptional credit score to be eligible.
If you own a property and you have a mortgage, you can also take advantage of the equity in your home to pay off your debts. This could result in lower interest rates, however when you stop paying then you may be forced to sell your house.
Some people choose to take a loan from their employer-sponsored retirement account, which is known as a . This option usually gives you access to lower interest rates but it also eats into your retirement funds.
>> MORE:


The author's bio: Jackie Veling covers personal loans for NerdWallet.







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