Everything You Need to Know About Debt Consolidation
A debt consolidation loan is a personal loan that a lender issues to you to pay off other debts. These are used to pay off other high interest debts like credit cards. Lenders set the payback period of the loan typically between two to five years and require a fixed monthly payment. Your credit profile will be the major factor in determining your interest rate and the fixed payments for the life of the loan.
People use debt consolidation loans as a strategy to pay off debt. It won’t work if you have too much debt or haven’t addressed the issues that contributed to you building up the debt.
Average rates will vary between lenders and your credit score is a determining factor. Rates can range from 13% with a great credit score and could be as high as 27% with a bad credit score.
Each lender will have different requirements, but typically you’ll need to be at least 18 years of age, have a credit profile and a bank account that shows some steady income. Some lenders may say there are no minimum credit score requirements, but they will check. Knowing your credit score can help you set expectations going in to the process.
An alternative for debt consolidation is a balance transfer credit card. These options are typically available for borrowers with good credit. These cards will offer a 0% introductory rate for the promotional period, typically between 6-24 months. There are also limits to the amount of the balance transfer and that will vary from card to card. If you opt for this solution, make sure you watch the promotional deadline because the rate is typically higher after the promotional period than a personal loan.
There are some advantages to choosing a personal loan over a balance transfer card. Borrowing limits are usually higher and the fixed payment requirement means that you will pay off your debt. In addition to paying off debt, your credit profile will also improve as your credit balances are lowered because a personal loan is reported as installment debt instead of revolving. Learn more about loans in our guide.