How To Get A Low Interest Debt Consolidation Loan

    Low interest rate displayed on stack of coinsMillions of Americans think they need a magician to get them out of credit card debt. If you’re one of them, it might be time to look at a debt consolidation loan.

    A debt consolidation loan rolls all your monthly bills into one less expensive payment. The trick is not mysterious magic, it’s simple math. Credit cards carry extremely high interest rates.  Many consumers pay rates as high as 25%-35%.

    A debt consolidation loan should have a considerably lower interest rate than those on the various bills that are driving you crazy. But there is a hitch, sort of. The interest rate you get will depend on your credit score.

    If it’s good, you can save a ton of money. But even if your credit score is poor, you could probably qualify for a loan that will save you money and simplify your life or find an alternative to debt consolidation.

    Beyond that, it’s hard to calculate the emotional value of not having to juggle a half-dozen or more bills every month. It’s easier to calculate how much a juggler might actually save.

    The average interest rate on credit cards in April 2019 was 17.68%, according to CreditCards.com. If you have $10,000 in credit card debt and are putting $250 a month toward that bill, it would take 61 months to retire the loan and you’d pay $5,212 in interest for a total repayment of $15,212!

    If you got a debt consolidation loan at 7% interest and paid $250 a month, it would take 46 months and you’d pay $1,420 in interest or $11,420 total.

    Americans had a whopping $1.003 trillion in credit card debt in the first quarter of 2019. The average credit card debt for households that carry such debt was $9,333, according to ValuePenguin.

    It doesn’t take a mathematician to see how debt consolidation makes sense, but it’s not a cure-all plan for debt relief. If you don’t curtail the spending habits that got you into the hole, you could end up worse off than ever.

    U.S. News & World Report surveyed 1,001 people who took out debt consolidation loans. More than 60% said the loan lowered their payments and improved their credit scores. What’s more, 68% said they changed their spending habits for the better.

    How to Get Low Debt Consolidation Loan Interest Rates

    The surefire way to get a low interest rate is to have a good credit score. Scores range from 350-800. Anything above 700 is quite good, while anything below 600 is drifting into poor to bad territory.

    A low score doesn’t mean lending institutions will bar you at the door. The most convenient place to start looking for a loan is your local bank, though it will pay to shop around. Credit unions often offer better rates, as do online lenders like SoFi, LightStream and Marcus by Goldman Sachs.

    If you shop for a low interest debt consolidation loan on the internet, beware of scams. Reputable debt consolidation companies will not require an upfront payment or guarantee loan approval.

    As to what kind of debt you can consolidate, the answer is pretty much anything as long as you qualify for the loan.

    Credit cards are a big driver of debt consolidation loans, but consumers can also use them to pay medical bills, car loans, student loans, personal loans and payday loans.

    Most Common Interest Rates by Credit Score

    Interest rates fluctuate, but they will always be tied to your credit score. If it’s 720 or better, you will get something in the 7% neighborhood.

    An average credit score (660-720) will yield a 9%-11% interest rate, while a poor score (under 600) will generally get you a 17%-25% interest rate.

    Again, the best consolidation loan won’t be the first loan offer you might receive. Lending institutions are obviously in the business of lending money, and they won’t make much if they accept only gold-plated applicants. Their rates vary, so you want them to compete for your business.

    Terms for a 5-year/$10,000 Debt Consolidation Loan

    Good Credit
    (above 720):

    7.25%
    interest rate

    $199.19
    monthly payment

    $11,951.62 total repayment
    ($10,000 principal plus $1,951.62 total interest over life of loan)

    Average Credit
    (660-720):

    10.25%
    interest rate

    $213.70
    monthly payment

    $12,822.16 total repayment
    ($10,000 principal plus $2,822.16 total interest over life of loan)

    Bad Credit
    (under 660):

    19.65%
    interest rate

    $263.00
    monthly payment

    $15,779.71 total repayment
    ($10,000 principal plus $5,779.71 total interest over life of loan)

    Process for a Low-Interest Debt Consolidation Loan

    Before applying for a loan, you must first figure out how much you need and what you can afford.

    The lending institution will make sure you have the sufficient income to meet your payment obligation. It will check your credit score, but you should also do that before even applying for a loan. You might find a discrepancy on  your credit report and have time to improve your score.

    The actual application process is relatively simple. Bring proper identification, proof of income and your most recent tax returns.

    Debt consolidation loans typically range from $1,000 to $50,000. If you’re approved, the funds are usually electronically transferred to your account or you can ask for a check.

    Other Considerations besides Interest Rates

    Getting the lowest interest rate is important, but it is not the end-all. You need to factor in origination fees, prepayment penalties, late fees and other charges.

    Debt consolidation loans come in two forms – secured and unsecured. Secured means you put up collateral, like a house, which can be foreclosed on if you fail to make payments on the loan.

    Most debt consolidation loans are unsecured, meaning no collateral is required. The disadvantage is they usually have higher interest rates than secured loans. The advantage is nobody is going to take your house or other collateral if you can’t meet the loan requirements.

    Lenders typically offer fixed-rate and variable-rate options. A fixed rate means the interest rate is locked in and will not change. A variable rate changes with the U.S. prime rate. They usually start with a lower rate than you’d get with a fixed rate, but they might end up costing more.

    Go with a fixed rate if you don’t want to worry about market fluctuations, though some variable-rate loans have caps that will limit the maximum interest rate.

    Low-Interest Debt Consolidation Loans for Bad Credit

    The easiest way to get a low-interest loan if you have bad credit is to be closely related to the president of lending institution. In other words, it’s probably not going to happen. Instead, you should look into nonprofit debt consolidation.

    The sad fact is loan terms always will be based on your creditworthiness. The way to improve that is to pay your bills on time, keep your credit card balances at less than 30% of your credit limit and don’t apply for more cards.

    Little of that can be done overnight, however, and most people in the market for a loan don’t want to wait a few months for their credit score to get out of sick bay.

    If you do have time to improve your credit score, it’s a good idea to work on that before applying for a loan. If you don’t and your score is still above the 580 range, there is still hope for a debt consolidation loan with bad credit.

    Lending institutions also consider debt-to-income (DTI) ratio. That’s calculated by dividing your monthly debt payments by your gross income. For instance, if you make $6,000 a month and have $2,000 in bills, your DTI is 33%. Some institutions allow up to a 50% DTI for loan applicants.

    Lenders also consider whether your loan will be secured or if you have a cosigner. Both will help.

    The internet has also expanded the market. Companies like Upstart.com are geared toward consumers who don’t have impressive credit scores or are new to the lending game. They place a heavier emphasis on an applicant’s education and earning potential.

    The drawback is the average interest rate is about 20%. But remember the math – if you have credit score of about 600, chances are your credit cards have at least a 25% interest rate.

    So even if you have bad credit, a consolidating credit card debt with a loan could save you money. And if you have good credit, it could save you a lot of money.

    Bill Fay

    Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at bfay@debt.org.

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