Debt Consolidation Loans

A debt consolidation loan lets you pay off existing debt so you have one obligation to manage. Some common benefits include reduced monthly payments, easier financial management and even a better interest rate. If you have poor credit, you may wonder if you can enjoy any of these benefits.

Benefits of Debt Consolidation Loans

When managed properly, debt consolidation loans have a number of financial and peace-of-mind benefits. Some common benefits of debt consolidation loans include:

• Potential for improved credit. Debt consolidation helps you gather your debt into one easier-to-manage obligation and may help you pay it off faster. This can help you reduce how much debt you have, which could improve your credit score. That's especially true if you pay your consolidation loan on time every month.
• Ability to save money. Debt consolidation loans may help you reduce your monthly debt payments so you can save money every month while still paying off your debt.
• You might pay off debt faster. When you consolidate high-interest credit card debt, you could make a monthly payment that's close to or less than your previous minimum payments. However, when you make minimum payments on credit card debts, you could take a decade or several decades to pay off the debt. With a consolidation loan, you often pay off the debt in a much shorter time frame.
• Simplifies debt repayment process. When you consolidate debts, you move from worrying about multiple accounts and payments to having to maintain one account and payment. For many people, simplifying the debt repayment process in this way makes it easier to manage and increases the likelihood payments will be made on time regularly.

Where to Get a Debt Consolidation Loan

You can get a debt consolidation loan from a variety of types of lenders. Some common options include:

• Online lenders. Some online lenders specifically deal in debt consolidation loans, making this the first stop you should make in a search for best debt consolidation loans. You can find others that offer personal loans and include debt consolidation as an allowed reason for those loans. Note that not every lender approves loans for the purpose of debt consolidation, so research loan options before you apply.
• Credit unions. Your local credit union might offer personal and debt consolidation loans. If you already have a relationship with the credit union because you have a checking or savings account there in good standing, you may have an increased chance of getting approved.
• Traditional banks. The same is true for some traditional banks. Talk to the customer service or loan department at your bank about options and if they'd be willing to take a chance on you, especially if you've been a long-time customer without any issues.

It's important to ensure you're watching for red flags that could indicate predatory lending or payday loan scams. Avoid loans that must be repaid within a short period of time, such as a few weeks, and lenders that don't put everything in writing before you agree to it. You should also avoid lenders that require fees up front just to apply for loans.

How to Get a Debt Consolidation Loan

If you have bad credit, you may be unsure how to improve your chances of getting a debt consolidation loan that can really help your financial situation. Here are some steps to consider taking:

1. Review your credit. Check your credit before applying for a loan to see where you stand. If a lender is looking for "good" credit, you'll need a score that's 670 or higher. Some lenders do provide bad credit loans for those with lower credit scores, but you may want to work on your credit, so you can qualify for other options.
2. Improve your debt-to-income ratio. Pay down some of your debt or increase your income with a second job. Lenders typically want to see that you have money left over after paying all your bills each month. So, a higher income and lower debt can make approval more likely.
3. Get a cosigner. If someone with good credit and income is willing to cosign for you, you could get a better deal on a loan.
4. Search for lenders. Do your research before you apply. Look for loans that meet your needs and that you feel you have a good chance of qualifying for. Applying for too many loans at once can rack up hard inquiries without you getting approved, and that's not ideal for your credit.
5. Compare options. Take time to compare your options. Look at terms, including length of loan and interest rate, to find out how much the debt will cost you total whenever possible.
6. Submit an application. Gather all the necessary documents and information and submit your application for a debt consolidation loan.

Types of Debt Consolidation

The type of debt consolidation you can get—or need—depends on your financial situation. Here are just a few:

• Basic debt consolidation loan. The most straightforward option—with this type of loan, the lender may pay off your debts directly. For example, you might submit the information for a personal loan and two credit cards. The lender makes payments on those accounts directly, and you owe the total balance to the new lender as a single loan.
• Personal loan used for debt consolidation. A personal loan is usually funded directly to you. You can then take the money and pay off your existing debts, making it a debt consolidation loan. This takes a bit of willpower, as you don't want to end up not paying off your existing debts and then having double the debt you started with.
• Home equity loan you use for debt consolidation. If you have equity in your home, you can take out a loan against it and use that loan to pay off existing debts. This can be a good idea because debts secured by your home often have lower interest rates. However, the same precautions about willpower apply, and you certainly want to ensure you can pay back the loan. If you don't, the lender can force the sale of your home to recoup its losses.

Debt Consolidation Loan Alternatives

If you're looking to consolidate your debts and can't find a debt consolidation loan for bad credit that works for you, you may have some other choices. The options below provide unique pros and cons for those who are struggling to pay their debts.

Peer-to-Peer Lending

Peer-to-peer lending refers to websites that match borrowers with people interested in lending money. These are not banks, which means they may or may not base approvals on credit scores. You could find individuals willing to take a chance on someone with lackluster credit, though they could charge a premium interest rate for that risk.

Credit Card Balance Transfers

If you want to consolidate debt that's entirely made of credit card balances, you can use a credit card balance transfer. Balance transfer cards let you transfer existing balances from another account at a temporarily lower interest rate. Depending on your credit and account situation, the APR might be as low as 0% during the introductory period. By working to pay off as much of the balance as you can at the lower rate, you can save a lot of money on the cost of your debt.

Personal Loans

As previously mentioned, you can also get a personal loan. You can then use the funds to pay off your existing debt, so you're only dealing with a single loan.

Debt Management Plans

With a debt management plan, you work with a credit counselor or trustee who manages your debts and payments. They may have some ability to negotiate better terms or settle debts on your behalf. You then make a single monthly payment to them and they divvy up that money to pay your debts. It's critical to only work with trusted people for this purpose, as you need to rely on them to handle your debts correctly.

Bankruptcy

A last resort option for those who are struggling with debts, bankruptcy can help you create a clean financial slate for the future. Note that it does come with a massive credit score hit and some other cons that are important to consider before moving forward.

Can You Get a Debt Consolidation Loan?

There's no such thing as a guaranteed debt consolidation loan. However, there are many financial options today, and it's likely you can find one that works for you by doing your research and applying for debt consolidation loans that seem right for your situation.