Understanding How to Use Debt Consolidation Loans

If you’re one of the millions of Americans juggling multiple debts, a personal loan for debt consolidation may provide a valuable solution. From auto loans to credit card debt, medical bills to student loans, the average American accumulates tens of thousands of dollars in debt by the time they reach middle age.

A debt consolidation loan is a personal loan that can be used to repay, or make a significant payment toward, other debts such as credit cards and outstanding household bills. The borrower then repays the fluctuate like credit card rates.

While a debt consolidation loan to pay off multiple debts may be an optimal strategy for many individuals, it isn’t ideal for everyone with assorted debts. The answers to the following questions can help you decide if a personal loan for debt consolidation suits your needs.

What credit score do I need for a debt consolidation loan?

Each lender has its own unique requirements for debt consolidation loans, including credit score thresholds. For example, lenders may look for at least a “fair” FICO score of 630 to 689, while others may extend debt consolidation loans to those with bad credit.

Is Debt Consolidation a Good Idea?

A debt consolidation loan can be a wise financial move if it offers a lower interest rate than the rate or rates attached to your existing debts or if it helps you repay your collective debt more quickly. Debt consolidation may also be a good idea if you have difficulty managing a monthly budget and keeping up with numerous bills.

How do you qualify for a consolidation loan?

Qualifications for debt consolidation loans vary by lender. Typically, borrowers must be at least 18 years old and be U.S. residents that hold a valid social security number.

A borrower’s eligibility will also depend on other factors, including credit score and monthly income. LendingUSA gives prospective personal loan borrowers a prequalification determination in minutes based on a soft credit check.

Is it better to get a personal loan or debt consolidation loan?

Several loan options are available for debt consolidation, including personal loans from conventional banks, home equity loans, and debt consolidation loans through companies like LendingUSA.

The best personal loans for debt consolidation are the ones that allow borrowers to reduce their overall debt loads and interest rates.

How long does it take to get approved for a consolidation loan? 

A personal loan for debt consolidation through a regular bank may take weeks from application through approval. Technology-first companies, like LendingUSA, can review your application and deliver a preapproval decision in seconds.

What are the risks of debt consolidation?

Like any type of loan, debt consolidation loans have their pros and cons. Some of the drawbacks of debt consolidation loans include:

  • Credit score check: Because your loan application may include a hard credit check, this may temporarily lower your credit score.
  • Potentially higher interest rates and fees: It’s crucial to evaluate a lender’s interest rates and fees and compare them with the interest rates and fees attached to your current debt. Consolidating your debt isn’t advantageous if your monthly payments and eventual debt load are higher.
  • Taking on new debt: While taking on a single new debt to pay down multiple debts is effective for many individuals, it may not eliminate all of your debt. It remains essential to your credit rating to make regular payments on the debt consolidation loan after paying your other debts.

Getting out of debt is a multi-step process, but debt consolidation can be a good first step. What are the benefits of a debt consolidation loan?

The best debt consolidation loans offer several advantages over struggling with various payments, such as:

  • Easier budgeting: Debt consolidation loans have a single, fixed monthly payment that reduces the number of bills you’re paying each month and makes budgeting more straightforward.
  • Fixed interest rate: Unlike credit cards, the interest rates of which can fluctuate dramatically, debt consolidation loans feature fixed interest rates. This means your interest rate will not change over the course of your loan repayment.
  • Improved credit score: In some cases, debt consolidation can help boost your credit score. If you use debt consolidation to pay down credit card balances near their limits, you will lower your credit utilization ratio – a key determinant in your credit score. Maintaining lower balances and making regular payments over time can help lower your credit utilization ratio and help increase your credit score.

Keep in mind that obtaining a debt consolidation loan doesn’t necessarily mean you should close all your credit cards after paying them off with that loan – doing so could also adversely impact your credit utilization ratio because it reduces the amount of credit you carry.

Do consolidation loans hurt your credit?

Lenders will run a soft credit inquiry, a hard credit inquiry, or both when you apply for a debt consolidation loan.

A soft inquiry will not change your credit score, but a hard credit inquiry may temporarily drop your credit score by a few points and the inquiry will remain on your credit report for two years.

Can I get my debt written off?

While there are avenues for reducing or writing off debt, they are difficult roads that often lead to dead ends.

Most people must eventually confront their debts. If a debt consolidation loan is not a viable option, you may seek the assistance of a credit counseling agency.

Why choose LendingUSA for debt consolidation loans?

LendingUSA’s personal loans are designed with borrowers in mind.

Our online application process allows you to check your rate and apply in minutes. You’ll receive a preapproval decision in seconds.

LendingUSA offers flexible, fixed monthly payments with no prepayment penalties and no interest on the principal for some loans if the loan is repaid in full within the first six months of the disbursement date*.

Connect with LendingUSA today to get started and check your rate.

*A borrower’s loan may have a No Interest on Principal Option Promotion included. This promotion can save the borrower money if the principal amount of the loan is paid in full within the Promotional Period (“Promotional Period”). During the Promotional Period, the borrower is responsible for making all monthly payments, and the loan will accrue interest on a monthly basis. If the borrower pays off the loan within the Promotional Period, the monthly payments made during that period, which include accrued interest, will be deducted from the principal amount of the loan. The lengths of Promotional Periods vary. Borrowers should review their loan agreements for complete details.

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