Have you been chipping away at multiple credit card balances but don’t feel like you are making progress? You may want to consider exploring debt consolidation loans. These unique loans are a great fit for many borrowers who feel overwhelmed with high-interest unsecured debt like credit cards, medical bills, and retail loans.
This guide helps you learn more about debt consolidation loans so that you can make an informed decision and take control of your financial future.
What Are Unsecured Debt Consolidation Loans?
Unsecured debt consolidation loans are a form of unsecured personal loan. Like all unsecured loans, unsecured debt consolidation loans are not backed by collateral like your home or car. However, these loans can provide more funds than your standard credit card or personal loan.
Depending on your credit score, you could obtain a lower interest rate on your debt consolidation loan, too.
The purpose of these loans is to pay off and consolidate several high-interest debts, such as payday loans, retail loans, and credit cards. However, if you have a high-interest credit card with a huge balance, you could use a debt consolidation loan to pay off just that bill.
Consolidating these debts enables you to make a single payment each month instead of juggling multiple payments, interest rates, and due dates. This simplifies your debt repayment process, potentially decreasing your monthly obligations.
If you get rid of multiple high-interest credit card bills with a lower-interest loan, you could get out of debt faster and save hundreds of dollars in interest.
What Debts Can You Consolidate?
Debt consolidation loans can be used to consolidate just about any outstanding unsecured debts, including:
Credit Card Bills
The most common use for debt consolidation loans is consolidating multiple credit card bills into a single loan payment. For instance, you might have three credit cards that are maxed out with interest rates ranging from 15% to 20% each.
If all three cards carry balances of about $5,000, you could obtain a debt consolidation loan in the amount of $15,000 to pay off all three cards. If your loan has an interest rate of just 11% and a 60-month repayment period, you would repay the $15,000 loan plus interest by making 60 equal payments over five years.
In this scenario, you could save money in interest and combine three bills into a single, potentially lower monthly payment.
Retail loans can also be paid off using debt consolidation. While you may not want to take out a debt consolidation loan just to pay off a retail loan, you could take care of these financial obligations as part of a service to also pay off your credit card balances.
For instance, assume you have the $15,000 in credit card debt referenced above and two retail loans, each of which carries a 15% interest rate and a balance of $1,000. Instead of borrowing $15,000, you could borrow $17,000 and get rid of these two retail loans in addition to your credit card bills. This would enable you to pay just one monthly bill instead of five.
When You Should Consider a Debt Consolidation Loan
A debt consolidation loan is a good option for you if:
You Have Good Credit
If you have good credit, you may be eligible to obtain a debt consolidation loan with a favorable interest rate. On the other hand, if your credit score is fair to poor, the interest rate on your debt consolidation loan might not be much different than the rate on your credit cards.
If you have credit in the 620-670 range, you could apply for debt consolidation loans to see what offers exist for you.
You Have Significant High-Interest Credit Card Debt
Debt consolidation loans are a good option if you have a significant amount of high-interest credit card debt. If you only have a few hundred dollars in credit card debt, paying off your balance will probably be the most practical approach.
You Have Created a Repayment Strategy
Using a debt consolidation loan to pay off your credit cards will eliminate the balance on those accounts but not close them. Therefore, you must create a clear repayment strategy to follow after you obtain your debt consolidation loan.
Commit to not rack up more debt on those credit cards, and be consistent about making your loan payments so that you can move toward financial freedom.
When You Should Not Take Out a Debt Consolidation Loan
Debt consolidation loans can be great financial products, but they are not for everyone. Here are three instances where you might want to explore other options:
You Don’t Intend to Alter Your Spending Habits
If you have not created a path to avoid additional credit card debt, consolidation might not be the right choice, as you could potentially double your debt. On that note, address unhealthy spending habits before taking out a debt consolidation loan.
You Have Minimal Debt
If you can pay off your outstanding retail loans and credit card balances within the next year, debt consolidation loans may not be suitable for you. Instead, create a firm repayment plan and stick to it. Before you know it, those credit card bills will be a distant memory.
How to Acquire a Debt Consolidation Loan
If you’ve decided that a debt consolidation loan is right for you, LendingUSA’s Freshstart Lending program may be right for you. This program helps you resolve your debt quickly and easily. For the program, you get enrolled in a participating debt settlement program1. After making six monthly program payments, the last three of which must be consecutive, on time, and not returned unpaid, you’ll be eligible to apply for a loan through Freshstart Lending. If approved, your loan will be used to pay off your enrolled debt and graduate early from the program.
Moving Forward After You Have Received Your Loan
In most instances, your debt consolidation lender will deposit the funds directly into your account. It’s important to immediately pay off your credit cards, retail loans, and any other monthly debts you want to get rid of.
With a plan forward, you can achieve financial freedom by strategically using a debt consolidation loan.
1Upon contacting LendingUSA, you will be referred to a participating debt settlement company (“DSC”) that offers a participating debt settlement program (“Program”). LendingUSA may receive compensation from the DSC related to this referral. By enrolling in a Program, the DSC will create a payment plan for you and set up a customer dedicated account (“CDA”) for you to make those payments to, so that they can be escrowed. You will then be asked to stop paying on your enrolled debt. The DSC will then attempt to settle your debt for less than what you owe and use those escrowed payments to pay off your creditors over time for a fee. Enrolling and participating in a Program may have adverse credit, tax, and legal consequences.