- 6 min read
- Consider a mortgage refinance if you own a home.
- Personal loans come with high interest rates.
- A cash-out vehicle refinance may work for many people.
Learn Your 6 Debt Consolidation Options
Looking for your best debt consolidation loan options? You are not alone. Where to find a debt consolidation loan and how to qualify for a debt consolidation loan are frequent questions for the Bills.com advice columnist, Bill. You have at least six options for a debt consolidation loan, which we outline in the table below.
The lenders we mention are not your only options. We included these lenders to show you examples of the rates and terms available today. You might be able to find better rates locally by shopping around. We discuss some important points about qualifying for a debt consolidation loan, and some alternatives to a debt consolidation loan below.
|Debt Consolidation Loans & Rates From Sample Lenders|
|Loan||Lender||Amount Available||Interest Rate||Term (months)|
|Bank Personal / Signature Loan||Citi||$500 - $50,000||10.49% - 25.49%||24 - 60|
|Peer-to-Peer Loan||Prosper||$2,000 - $35,000||6.73% - 35.36%||36 - 60|
|Cash-Out Mortgage Refinance||Chase||$215,000+||2.5% - 4.125%||60 - 360|
|Home Equity Loan||Patelco Credit Union||$5,000 - $250,000||6% - 7.817%||84 - 240|
|Cash-Out Auto Refinance||Wells Fargo||$5,000+||4.42%+||12 - 72|
|Credit Card Cash Advance||Discover||Depends on available balance||10.99% - 19.99%||Variable|
Source: Lender Web sites, April 2012
Debt Consolidation Loans
We display a range of loans in the table above. Let's look at each:
Bank Signature Loan
A signature consolidation loan does not require any collateral, which is also called "security." Because the loan is not tied to a vehicle or a house, the interest rate on a signature loan is higher than a secured loan. Citi, a bank we chose at random, charges from 10.49% to 25.49% interest on a personal loan. Why such a wide range? Different borrowers present different levels of risk, which we discuss below in the section "Debt Consolidation Loan Qualifications."
A peer-to-peer loan is exactly what the name suggests. Two companies, Prosper or Lending Club, broker peer-to-peer loans today. The interest rates vary widely, and are based largely on the borrower’s credit score.
Credit Card Cash Advance
Like a signature loan or peer-to-peer loan, a credit card cash advance is not secured. Therefore, like these other loans, the interest rate you pay on a credit card cash advance is higher than secured loans — up to 20% in the case of Discover.
Home Equity Loan
A home equity loan is really just a fancy name for a second mortgage. Because the borrower gives the lender the right to foreclose on their home if the borrower fails to repay the loan, the interest rate for a home equity loan is low — the 6% to 7% range. Borrowers need two key elements:
- A home or other real property
- Equity in the home or property
A quick and easy way to learn if you have equity in your home is to go to Web site like Zillow.com and learn the estimated market value of your home. Then look at recent statement on your mortgage, if you do not own your property outright, and find your current loan balance. Let us say your loan balance in $100,000 and your property is worth $250,000. Your loan-to-value ratio would be 100 divided by 250, which equals .4. In the mortgage business, your LTV would be 40% on this property. An LTV of less than 80% makes you a prime candidate for a home equity loan.
Cash-Out Mortgage Refinance
A cash-out mortgage refinance is similar to a home equity loan with one exception. Instead of creating a new loan, you are asking a lender to refinance your existing mortgage for one that is larger than the current balance. The difference is paid to you in cash, which you can use however you see fit, including remodeling, paying off a vehicle loan, or paying for a college education.
Cash-Out Auto Refinance
A cash-out auto refinance is exactly like a cash-out mortgage refinance, except that a vehicle is involved. If you own a high-value vehicle outright, consider a cash-out auto refinance.
Now that you understand your options, let's see if you qualify.
Debt Consolidation Loan Qualifications
The big question a potential lender asks a person seeking a debt consolidation loan is, "Do you qualify for a loan?" Qualification standards vary by lender and type of loan. In general, lenders look for these four qualities in a borrower:
- Steady income history: Have you worked or received income for the last two years? If you are self-employed, is your income steady or are there vast time gaps between jobs?
- Clean credit history: You do not need an 800 credit score to qualify for debt consolidation loan. However, the higher your score the higher your chance will be of a lender accepting your loan application. Put another way, the lower your score, the lower your chances are of qualifying for a loan.
- Low debt-to-income ratio: Some readers write to Bill and say, "I make $100,000 per year and have a 750 credit score, but do not qualify for a loan. Why?" After a brief e-mail conversation, the full facts emerge and we learn that even though these readers may have excellent income and high credit scores, their existing debts frighten potential lenders. For example, to qualify for an FHA mortgage, the FHA recommends a debt-to-income ratio of no more than about 40%. If you are spending half of your paycheck on student loans, car loans, and credit card payments, do not expect to qualify for a debt consolidation loan because your existing debt-to-income ratio is already very high.
- Reserves: Do you have access to other funds if you suffer a temporary loss in income?
There is one other qualification if you want a cash-out refinance or home equity loan: equity. As we discussed in the section above, your LTV is a critical qualification for any refinance or a home equity loan. Without a low LTV, do not expect to qualify for a home equity loan or a cash-out refinance.
A Very Important Question
Let us say you offer a lender a perfect package: You have steady income, a high credit score, and low debt. Is a debt consolidation loan your best option to solve your problem? A debt consolidation loan is not a good idea if you:
- Do not have a household budget, and
- Need a loan to pay-off debts relating to out-of-control spending, and
- A loan will not change your underlying problem
Look at your situation objectively. Is the loan a fix to a temporary setback? Or is the loan a Band-Aid that pushes your problems down the road? If a debt consolidation loan is a quick fix, then look at other solutions, which we discuss in the next section.
Best Debt Consolidation Loan Alternatives
If you do not qualify for a debt consolidation loan, or if a debt consolidation loan is not your best solution, consider your alternatives. Two options to examine are credit counseling and debt settlement. It is beyond the scope of this article to explain these in detail. Click on the links just mentioned to learn more about each.