A debt consolidation loan streamlines existing debts into one new loan. Most unsecured consumer debt can be consolidated, including credit cards, medical bills, utility bills, payday loans, student loans, taxes and bills sent to a collection agency. Having one monthly payment instead of several can make it easier to get your finances in order and could allow you to save money on interest fees. When shopping around, itâ€™s essential to find a loan with a lower interest rate and better terms than the original debts.
Paying down debt is hard work, but itâ€™s even more challenging when youâ€™re working against sky-high interest rates. Your credit score isnâ€™t the only factor that plays into loan pricing, but itâ€™s a big one. Generally speaking, the higher your credit score, the lower your interest rate.
On its website, credit bureau TransUnion explains that your credit score offers financial institutions a quick snapshot of your credit health. The manner in which scores are used is entirely up to the individual lender.
If your credit score isnâ€™t great, donâ€™t panic. Several other elements are also taken into consideration as part of the loan underwriting process, including:
Not all debt consolidation loans offer equal value, so itâ€™s important to do your homework. All else equal, the lower the interest rate on your debt consolidation loan, the lower your monthly payment. You want to achieve financial freedom as quickly as possible, and much of that weighs on finding the most competitive interest rate.
Shopping around to compare multiple loan rates is a step you canâ€™t afford to pass up, even if you have excellent credit. Each lender has its own criteria and pricing model, which can lead to major rate discrepancies. Limit your comparison shopping to lenders that perform a soft credit pull, so it doesnâ€™t lower your credit score.
LendingTree, the parent company of MagnifyMoney, allows you to compare up to 5 lenders without affecting your credit score. Find the best debt consolidation loan for you today!
Minimum Credit Score
LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified without impacting your credit score. LendingTree is not a lender.
A low credit score wonâ€™t necessarily prevent you from getting a loan, but it could impact your ability to get a competitive rate. Most people have credit scores in the range of 600 to 750, according to Experian. For scores that fall within the 300 to 850 range, the consumer credit reporting agency cites a score of 700 or higher as good and 800 or higher as excellent.
If your current credit score isnâ€™t great, take measures to improve it. Payment history and credit utilization can make up to 70% of a credit score, according to Experian, so simply paying your bills on time and keeping your balances low can be a tremendous help. You can also help your score by only applying for new credit only when absolutely necessary and getting a head start at paying your loans off now, if possible.
Interest rates play a huge role in the total price of your debt consolidation loan, but they arenâ€™t the only factor worth comparing. Taking out a new loan is a very big deal, so conduct plenty of research to make sure youâ€™re entering into an agreement that sets you up for success.
A debt consolidation loan can be an effective way to get your finances in order, but itâ€™s not the only option. Before applying for a loan, take a look at other alternatives to get a well-rounded look at every available route.
If the amount of debt youâ€™re trying to pay off is relatively small and you have a great credit score, a balance transfer credit card might be a better choice. Many balance transfer credit cards offer a 0% APR for an introductory period of time, which could allow you to pay off your debt without accruing any additional interest. This can help you save a great deal of money, but there are a few things you should know first.
In most cases, the 0% APR interest rate is a limited-time promotion, according to the Consumer Financial Protection Bureau. If the rate rises, your monthly payment could also increase. The CFPB also notes that the company can raise your rate if youâ€™re more than 60 days late on a payment. Additionally, you may have to pay a balance transfer fee, and if you also use the card to make purchases, the new charges may be subject to interest unless thereâ€™s also an introductory 0% APR for purchases.
If you own a home, you might also consider a home equity loan or a home equity line of credit, which will provide you with extra cash. Home equity loans come at a fixed rate, while home equity lines of credit have variable interest rates and follow a flexible repayment structure. Borrowing criteria vary by lender, but the amount of equity you have in your home will at least partially factor into the size of the loan youâ€™re able to take out. More equity tends to equate to better terms.
The best rates are typically given to homeowners with a mortgage that totals less than 85% of the homeâ€™s value and a debt-to-income ratio of 45% or less. This can be a great way to consolidate debt, but do remember you can lose your home if you donâ€™t keep up with payments.
Taking out a home equity loan could also require you to pay closing costs that can add up to hundreds or thousands of dollars, according to the CFPB. If the property declines in value, you could also run the risk of falling underwater on it. With that said, a home equity loan or a home equity line of credit could serve as an optimal way to pay off debt. As with any major financial decision, being well-informed will help you make the best choice for your unique situation.
Shopping around and comparing personal loans for debt consolidation is essential, but you might not know where to start. Visiting the website of every lender that offers debt consolidation loans isnâ€™t feasible, but LendingTree, the parent company of MagnifyMoney, has a one-stop tool that can recommend several debt consolidation loan offers.
Simply complete one online form, and LendingTree will run a soft credit pull that could match you with multiple loan offers. This is a convenient way to connect with multiple lenders in a matter of minutes. Participating lenders have a range of acceptance criteria, so you could find an attractive rate even if your credit score isnâ€™t the best.
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