Debt Consolidation Loans

Q: Will debt consolidation affect your credit score?

Lenders will typically make a hard inquiry into your credit report when you apply for any type of credit account, including a personal loan for debt consolidation. And it may cause your credit score to drop a few points. This hard inquiry won’t remain on your credit report forever, though — it usually drops off within one to two years. It's important to note that searching and comparing rates does not impact your credit score as lenders will only conduct a soft credit check to prequalify you. It's only when you take an offer and apply with a specific lender that the hard inquiry occurs By consolidating high-interest debt into a personal loan with a lower interest rate and paying down that debt, your credit score will likely improve.

Q: Is debt consolidation a good reason to get a loan?

Debt consolidation can be a good reason to get a loan, especially if your credit has improved and you are juggling multiple debts. By consolidating your debts into one loan with a lower interest rate, you can save money on interest and make it easier to pay off your debt. However, you should be sure to shop around for the best loan terms and compare different lenders before choosing one. You also need to be aware that consolidating your debt may not eliminate all of your financial problems, so it's important to create a budget and stick to it after you consolidate.

Q: What debt qualifies for debt consolidation loans?

Debt consolidation loans can be used to consolidate a variety of debts, including credit card debt, medical debt, unsecured loans, payday loans, and collection accounts. Debt consolidation loans can be effective, but it is important to make sure that you are able to repay the loan before taking one out.

Q: What credit score do you need for a debt consolidation loan?

If you're hoping to take out a debt consolidation loan, you'll likely need to have at least a fair credit score, which generally starts at 580. However, there are some lenders who may be willing to work with you if your score is lower than this.

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This Lantern site is operated by SoFi Lending Corp. in cooperation with Engine by MoneyLion. The preliminary loan offers presented on this site are from lenders that pay SoFi and Engine by MoneyLion compensation for marketing their products and services on this site. This affects whether a lender is featured on this site and could affect the order of presentation. Lantern by SoFi does not include all lenders in the market nor all of their available offerings.

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What Are Debt Consolidation Loans?

At its most basic, a debt consolidation loan is a personal loan taken out to pay off other debts. Ideally, the interest rate on the new loan is lower than the interest rate on the old debts. Using a personal loan to consolidate credit card debt is a common strategy. The average credit card interest rate is 19.07% as of November 2022 (according to the Federal Reserve's most recent report). If you qualify for a personal loan rate that’s lower than the rates on your credit card, you may be able to save money on interest over the life of the loan. Another advantage of debt consolidation loans is that they offer a fixed interest rate and a fixed loan term. So unlike credit cards, the interest rate won’t change on you — and your payment amounts will be the same every month. (You can also get a variable rate on a personal loan, in which case your monthly payments wouldn’t stay the same throughout the loan term.)

How Do Personal Loans for Debt Consolidation Work?

A personal loan for debt consolidation should ideally pay off other debts and not add to your debt load. So it’s a good idea to add up your current high-interest debts and borrow just that amount. After you apply and your loan is approved, the loan proceeds are distributed in one lump sum. Some lenders will deposit the money into your account, and then you pay off the high-interest debts yourself. Other lenders may pay those creditors directly, saving you that step.From that point, you will be responsible for the monthly payment on the new personal loan.

Can Any Debt Be Consolidated?

Typically, unsecured debt like credit card debt or medical bills can be consolidated with a personal loan. With the average credit card debt rising, this option can prove attractive.Not all debts are candidates for consolidation. It’s not usually an option for car loans or mortgages, which are secured debt.Federal student loans cannot be consolidated with a personal loan, but there are other options for managing student loan debt. If your credit is better now than it was when you originally took out the loans, you may be able to refinance your student loans with a private lender for potentially lower rates. Or, you can consolidate several federal student loans into a single Direct Consolidation Loan from the government to make payments more convenient. Note: If you refinance your federal loans with a private lender, you lose eligibility for federal student loan debt relief and forgiveness programs.

Pros and Cons of Debt Consolidation Loans

Personal loans have benefits and drawbacks. They aren’t right for replacing every kind of debt or for every individual’s financial situation.

Pros of Debt Consolidation Loans	Cons of Debt Consolidation Loans
Fixed interest rates are common	Some loans have fees and other charges
Potential to improve credit score	The debt still has to be paid
Fewer payments	Not right for every financial situation
Potentially low interest rate	Some people don't qualify for low interest rates

Pros of debt consolidation loans

Fixed Interest RatesMany personal loans have fixed interest rates rather than fixed versus variable — they remain the same over the term of the loan. If the rate on your personal loan for debt consolidation is lower than the interest rates on the debts you’re consolidating, you’ll likely save money on interest, depending on the loan term. (Choosing a very long loan term, like 10 years, may offset the savings from having a lower interest rate, especially if the new interest rate is only a little lower.)Improving Your Credit ScoreTaking out a personal loan can ultimately improve your credit score as long as you make payments on time. The lender will do a hard pull of your credit when you apply for a personal loan, which can temporarily drop your score a few points.In the long term, however, consolidating high-interest debts with a lower-interest loan may improve your score if you make regular, timely loan payments. Simplifying PaymentsWith a personal loan for debt consolidation, there is only one payment per month, as opposed to the multiple payments of the other debts. What's more, if you get a fixed rate, the payment will be the same every month, which makes it easier to plan or schedule automatic payments.Potentially Low Interest RatesQualifying for a debt consolidation loan that has a lower interest rate than your current debts could potentially save you money. Factors that influence consolidation loans rates include:

Your credit score: If you have a good credit score, you pose less of a risk to the lender, meaning you’ll likely qualify for a lower rate.
The loan term: Longer loan terms present more risk to the lender, so rates tend to be higher.
Your current financials: Lenders will assess your creditworthiness based on factors like monthly income, debt-to-income ratio (monthly debt divided by monthly income), and existing debt. A lower debt-to-income ratio also indicates less risk to the lender, meaning they may offer you a lower rate.

Recommended: How to Calculate Credit Card Interest

Cons of debt consolidation loans

These loans aren’t for everyone.Some Lenders Charge FeesAny fee a lender charges on a loan will be included in the loan agreement. It’s important to read and understand the loan terms and requirements before signing anything.Not all lenders charge fees, so compare lenders before you choose one. One common fee is an origination fee, which can be between 1% and 6% of the total loan amount. Other fees to look out for: late fees and prepayment penalties.It's Still DebtConsolidating debt doesn’t erase your debt — you just owe the new lender. But ideally, your repayment is on better terms. In order to keep your debt manageable, you may want to change your spending habits and otherwise figure out where and how you went wrong. Debt Consolidation May Not Be Right for EveryoneOne common goal of debt consolidation is to get an interest rate that is lower than the rate or rates you’re currently paying. Of course, qualifying for the best rate depends a lot on your credit score. If you don’t have great credit, there are debt consolidation loans specifically for bad credit. These lenders will work with you so you can get the most favorable terms possible with your credit score.Another option is to skip debt consolidation and focus on finding a repayment strategy that works for you. Recommended: 5 Factors That May Impact Your Credit Score

When Can Debt Consolidation Be a Good Idea?

A personal loan for debt consolidation debt has many benefits, but is getting one right for you? You’re likely a good candidate if:

You can consistently make timely payments, since late and missed payments can add fees and other charges to your loan balance
You qualify for an interest rate that’s lower than the rate or rates on the debts you plan to consolidate
You feel overwhelmed by the number of monthly payments you have — and have been missing them.

Getting a Debt Consolidation Loan

Every lender will have its specific qualifications, but borrowers are typically required to:

Be at least 18 years old.
Be a U.S. resident.
Not currently be bankrupt or in foreclosure.
Have a credit score that’s above the mid-600s to qualify for favorable rates and terms.
Have a debt-to-income ratio below 45 percent.

Checking your credit score and gathering necessary documents

Before applying for a personal loan for debt consolidation, a little prep work may increase your chances of qualifying for a loan with a favorable interest rate and terms. Start by requesting free copies of your credit report from Equifax, Experian, and TransUnion at AnnualCreditReport.com. Make sure to review your credit reports thoroughly, reporting any inaccuracies or errors to the pertinent agency. If your credit score is too low to qualify for favorable rates and terms, you may want to wait until you can make some positive changes to your credit report before applying for a loan.If you’ve checked your credit report and are confident in proceeding with the personal loan application, gathering relevant paperwork is the next step. You’ll likely need to verify your legal name, current address, and income. Your chosen lender will let you know exactly what documents they will accept and what information they need to verify.

Comparing and prequalifying with debt consolidation lenders

Comparing lenders — specifically their interest rates, fees, and other charges — is a good strategy to find the loan that is best suited for you.Keep your credit score in mind and be realistic about which loans you qualify for. You may also want to look for lenders who specialize in debt consolidation. See if the lenders you’re interested in offer prequalification, which involves the lender conducting a soft credit check and letting you know how much they’d lend you based on your qualifications. If you prequalify for the amount you desire, you can then submit an official application.

Submitting your application for a debt consolidation loan

On the application, you will likely need to provide personal information (name, address, social security number), credit score, and income to prove your credit trustworthiness and eligibility. You can generally expect to hear back from the lender within a few days. Once you’re approved for the loan, the lender will provide the next steps for setting an agreement.

Debt Consolidation Loan Alternatives

If you decide that debt consolidation isn’t for you, there are quite a few alternatives to consider.

Home equity

Tapping into your home equity is a standard alternative to debt consolidation. This is because it’s not uncommon for a person’s home to be their largest investment and, therefore, their largest asset.Your home equity is based on the current value of your home minus how much you owe on your mortgage. For example, if your home is valued at $200,000, and you owe $125,000 on the mortgage, you would have an estimated $75,000 worth of equity. Lenders will typically lend up to 80% of the amount of home equity to qualified applicants. In the above example, you might be able to borrow up to $60,000 in the form of a home equity loan or home equity line of credit (HELOC). Since home equity loans and HELOCs tap into the equity in your home, you must pledge your home as collateral to guarantee the loan. If you do not pay the loan, you risk losing your home.

Debt settlement

Credit card debt forgiveness is an appealing option if you can get it. Debt settlement companies may be able to help reduce the amount of debt you owe. For a fee, a debt settlement company will negotiate with your creditors and/or debt collection companies for you. If successful, this strategy can help you avoid bankruptcy.Using a debt settlement company may hurt your credit. Typically, you pay the debt settlement company instead of your creditors directly. Then, the company will pay the creditor when the negotiation is complete. Even after a debt is settled, how it’s reported to the credit bureaus is up to the lender. They will often close the account and report it either as “paid-settled” or “paid as agreed.”

Balance transfers

Another debt consolidation alternative is credit card balance transfers. This is simply the process of transferring outstanding debt from one credit card to another. This method is only ideal if you can pay off your debt during the low, introductory APR period of the new balance-transfer credit card. You usually need to have a good credit score to try this option, and you will be responsible for paying any balance transfer fees. Finally, your balance limit can affect how much debt you can consolidate. Overall, this method can be a good way to wrest control of high-interest debt, especially if you use a card with a 0% introductory APR offer (the longer the 0% APR period, the better, of course).

Credit counseling

Working with a nonprofit or for-profit credit counseling service is a viable debt consolidation alternative. Credit counseling companies can help you put together a Debt Management Plan (DMP) to pay your debts. As part of the DMP, a credit counselor will typically help you set a budget, discuss the reason for the debt, and craft a strategy to ensure a better financial future.Working with a legitimate nonprofit credit-counseling company is recommended by the Federal Trade Commission. You may pay a fee, but it will likely be lower than that of a for-profit credit counselor.

Debt Consolidation vs Debt Management vs Debt Settlement

Learn the key differences between debt consolidation, management, and settlement.

Debt Consolidation	Debt Management	Debt Settlement
You borrow money in the form of a personal loan to pay your creditors, then you pay the balance of the personal loan over time.	You pay the debt management company, who then pays your creditors.	You negotiate with your creditor, or pay a company to do so for you, to pay a lesser amount than you owe.
May initially lower your credit score due to applying for more credit, but is likely to have a positive impact over time if you make regular, timely payments on the personal loan.	May have a positive impact on your credit score over time because the debt management company will pay your creditors on your behalf, and may be able to have finance charges reduced or waived.	May have a negative impact on your credit score for up to seven years if the lender reports the debt to the credit bureaus as settled instead of paid in full.
Personal loan lenders sometimes charge fees, but you may be able to find one who does not.	Debt management companies, whether for profit or nonprofit, will likely charge a fee for their services.	There is not typically a fee to settle a debt with a lender, but the negative impact on your credit score can be significant.

Tips for Paying Down Debt

If you’re facing a mountain of debt, the good news is that there are ways to trim this burden. Some effective debt reduction strategies are:

Evaluate your financial situation. Figuring all the debts you owe and the different interest rates from your credit card statements will ultimately help you determine which accounts you should prioritize. If possible, try to focus on paying the debts with the highest interest rates first.
Create a budget and stick to it. You won’t reduce your debt with the same spending habits. Refine your budget by eliminating unnecessary expenses and devoting the cash instead to paying down debt.
Employ a payment strategy. You can try implementing the snowball method, where you pay your smallest debts first. Or, you could try the debt avalanche method and start by paying off your high interest rate balances.

The Takeaway

A personal loan to consolidate debt may be one way to get on a healthy financial path, simplify your money management, and potentially pay off your debt sooner. If you have a better credit score now than when you first took on debt, you may be able to save money by consolidating and repaying your debts at a lower rate. Comparing interest rates and fees will help you find the best lender for your financial situation. See your options for debt consolidation today on Lantern by SoFi.

Additional resources

Paying Down Debt: Can You Use a Personal Loan To Pay Down Credit Card Debt?

When faced with high interest debt, whether from credit cards or another source, many people opt for a personal loan to pay down their debt. Learn more today.

Personal Loan Approval Odds: Understanding Your Chances

How can you boost your chances of getting a loan approved? In this article, learn more about the typical personal loan approval odds.

12 Types of Personal Loans: Pros & Cons of Each

The kind of loan that will work for you depends on various factors, so learn what the different types of loans are and find the right one for your needs today.

FAQ

Will debt consolidation affect your credit score?

Is debt consolidation a good reason to get a loan?

What debt qualifies for debt consolidation loans?

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