- 5 min read
- Debt consolidation loans differ in interest rates, fees, and length of loan.
- Review the requirements for obtaining debt consolidation loans.
- If a debt consolidation loan isn't appropriate, then look for other debt relief solutions.
What is the Best Kind of Debt Consolidation Loan?
If you are having problems managing multiple bills and debt, a debt consolidation loan may be a good solution for you. A debt consolidation loan could give you a lower monthly payment, a longer time to repay the loan, and the ease of making only one payment on your debt.
There are a variety of debt consolidation loans available. In order to find the right one for your situation, carefully weigh the pluses and minuses of these debt consolidation options:
- Unsecured Debt Consolidation Loan
- Cash-Out or Home Equity Mortgage
- Balance Transfer Loan
Get A Debt Consolidation Loan Quote Now
Are you thinking about consolidating your debt? Not sure if you qualify for a debt consolidation loan? Bills.com makes it easy to shop for a bill consolidation personal loan. Start by filling in your credit score, zip code, loan purpose, and the amount of loan you need. Check out different offers and click on the appropriate ones.
Unsecured debt consolidation loans are back in style. According to a recent report from TransUnion, one of the top Credit Reporting Agencies, at the end of the third quarter, personal loan balances reached a record-high $132.4 billion, an increase of 18 percent from the previous year, and $20 billion more than the end of Q3 2017.
Recently, Bills.com turned to Joseph Toms for some insights about personal loans. "In 2019, we expect even greater personal loan demand, as consumers look to tackle their burgeoning debt loads," says Toms, president of FreedomPlus®, a leading personal loan lender and part of the Freedom Financial Network® family of companies.
While consumers are using personal loans for everything from home improvement projects to weddings, debt consolidation is the most common use, says Toms. "The reasons are simple," he explains.
"Using a personal loan to consolidate debt simplifies the number of monthly bills to be paid, and can save a tremendous amount on total interest paid."
Using a personal loan as a debt consolidation loan also introduces financial discipline, he says, with definitive schedules and timelines for repayment.
Besides banks and credit unions, there are now many online lenders offering personal loans. Many of the lenders seek to serve niche markets. While credit scores are a critical factor in qualifying for a loan, many lenders rely on other criteria. For example, SoFI targets a market of well educated, high income or high potential income borrowers using non-traditional underwriting criteria. FreedomPlus also uses innovative underwriting tools that allow it to offer loans to borrowers with improving circumstances.
Lenders pull your credit, to examine if you have a history of repaying your debts on time. However, you can shop for a loan based on a soft credit pull that does not affect your credit score.
Besides credit, lenders look at your income, especially your debt-to-income ratio (DTI). Your DTI is calculated by taking your monthly debt payments (such as your vehicle loan, mortgage, student loan, etc.) and dividing it by your monthly income. If you have a DTI below 45%, you will have an easier time qualifying than a person with a higher DTI, who may be refused a loan for that fact alone.
Using the equity in a home is a popular type of debt consolidation loan. The main advantage of a mortgage loan is that you can spread your payments over a long period, up to 30 years. Mortgages also come with lower interest rates. These features translate into low affordable payments.
With the rise in home prices and improving economic conditions, home equity loans are now more accessible to homeowners. In general, you need a good credit score, although an FHA loan requires only a 500 FICO score (for a loan with an LTV under 90%) and conventional loans require a 620 FICO score. Most lenders do not offer cash-out financing, including your current mortgage, above 80% of your home's value, although some lenders do offer 85%.
The main downsides of taking out a debt consolidation loan that uses your home equity are that you turn unsecured debt into secured debt. If you miss a payment on your secured debt, you will suffer financial harm of a late fee and a hike in your interest rate. If you miss a home payment, you place your home at risk of foreclosure.
Another type of debt consolidation loan is a credit card balance transfer. You might have received offers to pay off your current credit card balances with a new credit card. It is a good idea to read those offers carefully. Transfer offers generally have a teaser rate, perhaps 0%, fixed for a 12 month period of time. The lower interest rate applies to the amount used to pay off old debt. It doesn't include new purchases and debt.
The main advantage of a balance transfer is the low-interest rate. If you can aggressively pay off your debt, then you can save money on the interest. However, be careful to read all of the fine print. Balance transfers generally come with high origination fees. Also, it is very important to not be a day late on any payment. One false step and your low-interest rate will skyrocket to a rate as high as 29.99% interest or even higher!
Which is the Best Debt Consolidation Loan Option?
There is no universal best answer for everyone who wants to consolidate debt. Here are a few tips:
- If you want a low monthly payment and own a home with equity, consider a cash-out mortgage refinance.
- If you want to consolidate your debt into higher monthly payments, then consider unsecured personal loans.
- If you have high unsecured debt and poor credit scores, you may want to explore debt settlement or credit counseling. However, each consumer is different, so shop around to find the debt consolidation option that best fits your needs.
Check Out BIlls.com Debt Navigator
Not sure if a debt consolidation loan is right for you? If you aren't sure which debt relief option is right for you, then check out Bills.com innovative Debt Navigator. With just a few questions the Debt Navigator will give a personalized answer to help you compare debt relief options.
Did you know?
If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q2 2022 was $16.15 trillion. Student loan debt was $1.59 trillion and credit card debt was $0.89 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 Urban.org 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 Hawaii, 16% have any kind of debt in collections and the median debt in collections is $1866. Medical debt is common and 5% have that in collections. The median medical debt in collections is $339.
Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.