What type of loan is best for consolidation?

The types of loans that can be used for debt consolidation are unsecured personal loans, secured personal loans and home equity loans. You can also use other methods to consolidate debt, such as a balance transfer credit card or a home equity line of credit.

Types of Loans Used to Consolidate Debt… read full answer

Unsecured personal loans

An unsecured personal loan is the best way to consolidate debt because you do not have to put anything up as collateral. The lender will base their decision on a number of factors, like your credit score, income, employment status and existing debt. You'll typically need a credit score between 580 and 700 to qualify.

Secured personal loans

A secured personal loan requires you to provide collateral to the lender, such as money in a bank account. If you can't pay back the loan, the lender can keep the collateral. These loans are very easy to get and are available to people with bad credit.

Home equity loans

You can use a home equity loan to consolidate debt. The amount you can borrow depends on your equity in the home - the difference between the value of the home and what's left of the mortgage. The home will also serve as collateral for the loan.

Other Ways to Consolidate Debt

• Home equity lines of credit: Home equity lines of credit function like a credit card in that you can borrow money at will up to a certain limit. The amount you can borrow will depend on your home's equity, and your home will serve as collateral.
• Balance transfer credit card: Balance transfer credit cards allow you to move your loan balance to a credit card. Some balance transfer credit cards offer 0% APR introductory periods, which allow you to pay off your loan interest-free for a set amount of time.
• Loans from friends or family: Friends or family members may be willing to lend you money to pay off your existing debts. They may have more flexible terms than major lenders.

Ultimately, the best type of loan for consolidating your debt will be the one that saves you the most money and gets you out of debt the fastest. If you're interested in a personal loan to consolidate debt, check out the free pre-qualification tool on WalletHub.

Debt consolidation won’t give you bad credit when handled correctly, but it may temporarily lower your credit score. A debt consolidation loan or a balance transfer credit card can hurt your score due to the hard inquiry from the application and the drop in the average age of your accounts. You could also suffer credit score damage from the change in your credit utilization and from … read full answerdebt settlement companies posing as debt consolidation companies. In the long run, though, if you do things correctly, debt consolidation is likely to help your credit.

To see how debt consolidation may affect your credit, you can use WalletHub’s free credit score simulator. You can also learn more about common effects below.

How Debt Consolidation Can Affect Your Credit

1. Hard inquiry: A hard inquiry occurs when financial institutions “pull” your credit history when you try to open a new loan or credit card account. One inquiry will likely drop your credit score by 5 to 10 points, but many inquiries within a short time may have a bigger impact on your score. If you make a few months of timely payments, however, your score should go back to normal.
2. Decrease in the average age of your accounts: If you use a new loan or balance transfer credit card to consolidate credit card or loan debt, the average age of your accounts will decrease. Credit score calculations include the “age” of your open loans and lines of credit. The longer your accounts are open and used responsibly, the better your credit will be.
3. Change in your credit utilization: Credit utilization is the percentage of your credit limit that you’re using. Consolidating multiple debts on a new credit card could lead to high credit utilization on that card, which could hurt your score. However, the faster you pay off what you owe, the better your utilization ratio will become. Consolidating debt with a loan moves the debt to an account that does not factor into your overall credit utilization. Therefore, your overall utilization decreases.
4. Debt settlement posing as debt consolidation: When choosing a form of consolidation, be wary of debt settlement companies posing as debt consolidation companies. These settlement companies “help” you consolidate by negotiating with your creditors to reduce how much you owe. This seems helpful, but the companies will actually withhold funds from your creditors until they reach a settlement. In the end, debt settlement is a huge blow to your credit score.

Final Thoughts

Overall, debt consolidation won’t give you bad credit when you handle it well. Some tips to help you stay on track with your debt consolidation include sticking to a strict payment schedule, making a budget and monitoring your spending habits. If you do handle things correctly, your consolidation is likely to help your credit.

You can track your progress by checking your credit score for free on WalletHub.