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Tips to Choose a Debt Consolidation Loan

Tips to Choose a Debt Consolidation Loan

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Betsalel Cohen
UpdatedJun 11, 2024
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    5 min read
Key Takeaways:
  • Choose a debt consolidation that fits your financial situation.
  • Check to see if a loan fits your budget and your credit score is sufficient to qualify.
  • Then, shop around for an affordable debt consolidation loan at the best terms.

Choose a Debt Consolidation Loan that Fits Your Pocketbook

Juggling bills, or just keeping track of them, can be a burden. Missing a payment on a credit card can be costly, as the credit card company may jack up your interest rates. If you are one of the millions of consumers who have built up credit card debt, then now is a great time to look at your options.

Debt consolidation loans are one popular debt relief option. According to Joseph Toms, president of FreedomPlus, a leading personal loan lender and part of the Freedom Financial Network family of companies,

"In 2019, we expect even greater personal loan demand, as consumers look to tackle their burgeoning debt loads"

If used properly, a debt consolidation loan can help you lower your financial costs and get you of debt within 2-5 years. Does consolidating your debt with a debt consolidation loan always make sense? The plain and simple answer is: No. Before you shop around for a debt consolidation loan, make sure that you are choosing the best financial product for your pocketbook.

Here are two easy steps to show you how to choose a debt consolidation loan:

  • Step 1: Ask yourself some preliminary questions.
  • Step 2: Shop around for a debt consolidation loan

Step 1: Answer these three questions to help you choose a debt consolidation loan

Q1: Can I get through the door? Credit and income

A debt consolidation loan requires a good credit score and a decent debt to income ratio (DTI). You need to make sure that you have a steady income and the payments are affordable. Taking on new credit and missing payments will not only get your further in debt, but it will also ruin your credit score.

Lenders have different criteria regarding credit scores, credit history, and your DTI. Their rates and fees will vary depending on your overall financial situation.

According to Andy Dull, VP Credit Underwriting at FreedomPlus:

Paying off debt takes sacrifice, in the form of bigger payments, and are not designed for consumers struggling to make their minimum payments!

If you are running up debt because your income isn’t sufficient to cover your monthly expenses, then stop looking for a debt consolidation loan. Get your budget in shape. If necessary, seek professional help.

Q2: Am I saving money?

If you have unsecured debt with a high-interest rate, then choosing a debt consolidation loan can be a good option. By taking yourself out of the minimum payment cycle, you can set up a fixed payment schedule, save money, and get out of debt sooner.

For example, let’s say that you have a credit card debt of $15,000 and paying 18% interest, with a monthly payment of $300 ( 2% of your balance). If you refinance that into a 5-year personal consolidation loan, you can be debt-free almost three years earlier and save close to $10,000 in interest fees. (Remember to check on upfront fees).

Q3: Do I want to improve my Credit Score?

Over the long run, a debt consolidation loan can help your credit score. By paying off your credit cards, you improve your credit utilization rate. You also diverse your credit portfolio, which can boost your credit score.

However, if you want to maintain and improve your credit score, always make your payments on time. Also, avoid running up your credit card debt.

» SUGGESTED:Check debt consolidation rates now

Step 2: Shop for a Debt Consolidation Loan

Since a debt consolidation loan is a simple product that has only a few elements, shop around for a loan based on these four factors:

  1. Interest rate: The main criteria that affect your interest rate is your credit score, financial situation, and the length of the loan.
  2. Origination Fees: Upfront fees differ from lender to lender. Your credit score can also influence the fees and hence the overall pricing of the loan.
  3. Term: The length of the loan (together with the interest rate and sum) will determine the monthly payment. A shorter period means getting out of debt early; however, make sure that higher payments are affordable.
  4. Reputable company:  Look for a reputable company. There are many banks, credit unions and online lenders offering debt consolidation loans.  Also, there are many new Fintech companies. Advice: If you have bad credit and are still contemplating a debt consolidation loan, then be careful of payday lenders or bad credit debt consolidation lenders. Avoid paying an upfront fee to secure approval. Only pay at the time the loan is paid out to you.

Debt consolidation loan with your home's equity

Did you build up equity in your home? If so, then consider a cash-out debt consolidation loan? If you have built up equity in your home and are looking for lower monthly payments, consider a cash-out refinance or Home Equity Loan that allows you to consolidate your debt. Due to the long payoff period and lower interest rates, you can consolidate debt into an affordable payment. Also, it is possible to qualify with lower credit scores.

However, keep in mind that you will be lengthening the time you are in debt and be transferring unsecured debt to secured debt.

Not sure if a debt consolidation loan is right for you?

Not sure if a debt consolidation loan is the best fit? If you have excellent credit then compare a debt consolidation loan with a balance transfer. If you are struggling then look for an option that lowers your monthly payment. Consider a credit counseling or debt settlement plan.

» SUGGESTED:Claim your free debt assessment by

Dealing with debt

If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q1 2024 was $17.69 trillion. Student loan debt was $1.60 trillion and credit card debt was $1.12 trillion.

A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.

The amount of debt and debt in collections vary by state. For example, in Minnesota, 13% have any kind of debt in collections and the median debt in collections is $1623. Medical debt is common and 2% have that in collections. The median medical debt in collections is $418.

To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.