Everything You Need To Know
To apply for a debt consolidation loan, you submit the amount of your existing debts. Upon approval, you combine all those debts into a single new loan. This can save you time and money by lowering the interest rate and monthly payments. By making your outstanding debt easier to manage, you are also in a better position to pay it off in a shorter amount of time.
Most debt consolidation loans come at a fixed interest rate. So, you pay the same amount every month until the loan is paid off. Let’s say you have four credit cards from four different banks, all at varying interest rates. You could use a debt consolidation loan to pay off those cards and have just one loan to manage instead of four. Simple, right? Just be sure the new loan offers a lower interest rate than the average of your current credit card lenders.
How Does Debt Consolidation Work?
There are two types of debt consolidation loans:
- Secured loans are backed by a large personal asset like your home or car, which serves as collateral if you default on the loan.
- Unsecured loans don’t need asset backing, which makes them harder to obtain. Without collateral, the interest rates could be higher and there will be fewer options. But the interest rates are fixed, and you still will pay less in the end than if you tried paying off multiple loans on your own.
Since most lenders require a minimum credit score of 670, not everyone qualifies. Even if you are over 670, a negative payment history could spoil your chances for approval.
Debt consolidation loans for good credit scores
Let’s say you need a $35,000 debt consolidation loan and your credit score is in a healthy range between 740-799. You can expect an interest rate of around 10.99%. Here is what your monthly payments would look like:
- $1146 for 36 months = $41,256 total cost over 3 years
- $904 for 48 months = $43,392 total cost over 4 years
- $761 for 60 months = $45,660 total cost over 5 years
- $666 for 72 months = $47,952 total cost over 6 years
- $599 for 84 months = $50,316 total cost over 7 years
Consolidating three credit cards into one low-interest loan
| Loan Details | Credit Cards | Consolidation Loans |
|---|---|---|
| Interest % | 28% | 12% |
| Payments | $750 | $750 |
| Term | 28 Months | 23 Months |
| Bill Paid/Month | 3 | 1 |
| Principal | $15,000 | $15,000 |
| Interest | $5441.73 | $1820.22 |
| Total | $20441.73 | $16,820.22 |
