A debt consolidation loan is a personal loan used to pay off more than one existing debt at the same time. The borrower receives a lump sum of money from the lender and uses that money to pay off their other debts. Those debts thus “consolidate” into one balance owed to the one new lender, with one monthly payment for the borrower. Ideally, the interest rate on the new loan will also be lower than the rates on the old loans that were consolidated. The consolidation loan will usually last for around 12 – 60 months.
With a debt consolidation loan, you should be able to consolidate almost any type of existing debt – whether that’s from other personal loans, credit cards, medical bills, or more. That’s because in most cases, issuers don’t offer loans specifically targeted for debt consolidation, but rather have general-purpose personal loans that you can use for whatever you like. One notable exception is that many issuers will not allow you to pay off student loan debt with a personal loan.
Some lenders may have different terms for debt consolidation loans compared to personal loans for other purposes. For example, LightStream’s overall personal loan APRs range from 3.99% to 16.99%. But when it comes to loans for debt consolidation specifically, the minimum is 5.95% and the maximum is 16.79%.
The process of getting and paying off a debt consolidation loan is fairly simple. You apply for a loan for enough money to pay off whatever existing debts you want to combine. To get approved, you’ll usually need a credit score of at least 660. There are loans that accept lower scores, but they’re less likely to give you interest rates lower than you’re currently paying. Once you’re approved and receive your funds, you send a check to each existing lender to pay off your balance. You will no longer owe debts to your old lenders; instead, you will owe a new debt that’s the size of all the old debts put together.
However, it’s important to note that some personal loan providers may charge you an origination fee to open the loan – so your new debt could be larger than the sum of your old debts. In this case, it’s important to make sure that the new loan’s interest rate is significantly lower than those of your old debts. The main purpose of a debt consolidation loan is to save money, so you don’t want to end up paying more in the long run.
Another good way to consolidate debt is to get a balance transfer credit card and move several debts onto it. Balance transfer cards tend to have a 0% APR for 12 – 21 months and then revert to a relatively high regular APR after that. You might also consider consolidating debt through a home equity loan, which lets you use the funds for nearly any purpose.
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