Is it smart to get a personal loan to consolidate debt?
Debt consolidation is ideal when you are able to receive an interest rate that's lower than the rates you're paying for your current debts. Many lenders allow you to check what rate you'd be approved for without hurting your credit score so you can make sure you're okay with the terms before signing on the dotted line.
Taking out a debt consolidation loan can help put you on a faster track to total payoff and may help you save money in interest by paying down the balance faster. This is especially true if you have significant credit card debt you carry from month to month.
Consolidating your debt into a single personal loan can combine the savings of a lower interest rate with the convenience of a single payment each month.
It makes getting out of debt easier — and sometimes cheaper. That said, debt consolidation isn't a magic bullet. It can temporarily ding your credit scores or bring even more damage if you're not disciplined with your debt repayment.
As of November 2023, the average interest rate on a personal loan with a 24-month term was 12.35%, according to data from the Federal Reserve. So, by using a personal loan to pay off your credit card debt, there could be significant savings, as the average credit card rate is currently 21.47%.
Consolidation has potential downsides, too: Because consolidation can lengthen your repayment period, you'll likely pay more in interest over the long run.
Debt consolidation might lower your monthly payments, make managing your monthly payments easier, decrease your interest rates and save you money overall. But there are also potential drawbacks, such as upfront fees and the risk of winding up deeper in debt.
If a credit card account remains open after you've paid it off through debt consolidation, you can still use it. However, running up another balance could make it difficult to pay off your debt consolidation account.
If you have excellent credit, high income and are borrowing a relatively small amount of money, it can be easy to get approved for a debt consolidation loan. On the other hand, if you have poor credit, low income and are applying for a large loan, it may be difficult to get approved.
Loan debt consolidation is when you take out a new loan to pay off multiple debts. Four types of debt are commonly consolidated: credit card debt, student loan debt, medical debt and high-interest personal loan debt. You may reduce the overall cost of repayment by securing better terms and interest.
What is the best Debt Relief program?
| Company | Forbes Advisor Rating | BBB Rating |
|---|---|---|
| Accredited Debt Relief | 4.0 | A+ |
| Money Management International | 4.0 | A+ |
| CuraDebt | 3.9 | A+ |
| New Era Debt Solutions | 3.8 | A+ |
Every lender sets its own guidelines when it comes to minimum credit score requirements for debt consolidation loans. However, it's likely lenders will require a minimum score between 580 and 680.
- SoFi: Best for fast funding.
- Upgrade: Best for poor or thin credit.
- Achieve: Best for quick approval decisions.
- LendingClub: Best for co-borrowers.
- Discover: Best for excellent credit.
- Happy Money: Best for credit card consolidation.
- LightStream: Best for large loans.
In most cases, you can pay off a personal loan early. Your credit score might drop, but it will typically be minor and temporary. Paying off an installment loan entirely can affect your credit score because of factors like your total debt, credit mix and payment history.
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
A personal loan will cause a slight hit to your credit score in the short term, but making on-time payments will bring it back up and can help improve your credit in the long run. A personal loan calculator can be a big help when it comes to determining the loan repayment term that's right for you.
Success with a consolidation strategy requires the following: Your monthly debt payments (including your rent or mortgage) don't exceed 50% of your monthly gross income.
Debt consolidation loans are specifically designed to help you pay off a lump sum of debt, whereas personal loans are for when you need cash for a variety of reasons. If you're considering debt consolidation, you want to be sure that it's the right choice and that you select the best loan for your financial situation.
Debt consolidation itself doesn't show up on your credit reports, but any new loans or credit card accounts you open to consolidate your debt will. Most accounts will show up for 10 years after you close them, and any missed payments will show up for seven years from the date you missed the payment.
National Debt Relief is a legitimate company providing debt relief services. The company was founded in 2009 and is a member of the American Association for Debt Resolution (AADR). It's certified by the International Association of Professional Debt Arbitrators (IAPDA), and is accredited by the BBB.
How can I consolidate my debt without affecting my credit score?
- Personal Loans. A personal loan is one of the most common methods of merging multiple debts into one. ...
- Home Equity Loans. With a home equity loan, you can borrow against your home's equity and use the money to pay off existing debts. ...
- Balance Transfers.
And, generally, that debt does not become taxable unless it is discharged (canceled or forgiven). If that debt is discharged, you may well owe taxes on the amount you don't pay back. Loans that are not taxed as income include: Personal loans for credit card consolidation or major purchases.
Debt consolidation is when you move some or all of your existing debt from multiple accounts (such as credit cards and loans) to just one account. To do this you'd pay off – and potentially close – your old accounts with credit from the new one.
However, credit cards and personal loans are considered two separate types of debt when assessing your credit mix, which accounts for 10% of your FICO credit score. So if you consolidate multiple credit card debts into one new personal loan, your credit utilization ratio and credit score could improve.
Banks, credit unions, and installment loan lenders may offer debt consolidation loans. These loans convert many of your debts into one loan payment, simplifying how many payments you have to make.
