If you are thinking about pursuing a debt consolidation loan, the most important factor to begin with is to choose a legitimate company or organization who will help you overcome your debt and consolidate your multiple payments into one. Of course, once you choose a company, you will still have to pay attention to the details to understand the loan fees, charges and terms. Just because you are using a reputable company, you will still need to be cautious when approaching a debt consolidation loan.
What is a Debt Consolidation Loan?
A debt consolidation loan is fairly simple, until you start to look at the fees and charges. You take out a loan in one lump sum, and then use that money to pay off your current debts. Although it sounds easy, there are several factors to consider before deciding if a debt consolidation loan is the best decision for your financial situation.
This type of loan will only work if it has a lower interest rate than the credit cards or other debt you are looking to pay off. If the debt consolidation loan interest rates are similar, you won’t be saving any money by consolidating. It is essential that you can afford the monthly payments in order to pay back the debt consolidation loan. The goal is to pay off or pay down your debt without causing any further damage to your credit score.
A loan with a lower interest rate will actually save you money over time as opposed to continuing to pay each account with its own high interest rate. This is one advantage of a debt consolidation loan. You should only apply for a debt consolidation loan if it offers a monthly payment you can afford. In most cases, the monthly payment will be less than the total payments you are making on your accounts now
A debt consolidation loan will eliminate multiple monthly payments to each of your creditors. All your payments will be rolled into one, so the confusion is eliminated, and you only have to worry about the one loan payment each month until the loan is paid off. This will not only help reduce your stress and anxiety when it comes to paying your bills each month, but if you remain current on your payments, you will eventually see an increase in your credit score as well.
What to Look for When Choosing a Debt Consolidation Company
There are several aspects to consider when choosing a debt consolidation company. Making the wrong decision and falling for a scam can damage your finances nearly beyond repair. Do some research online to investigate a few companies you may want to use. You can usually tell quickly which ones are legitimate and which ones are not, but it may be confusing. Look for a company that has a proven track record of success, and that has an official business license or Better Business Bureau (BBB) rating.
The best debt consolidation loan for you will have a low interest rate, minimal fees, competitive interest rates and flexible terms. A reputable debt consolidation loan organization will offer a wide range of loan amounts, so you don’t have to borrow more than you need. Remember, the more you borrow, the more you will be paying back in interest. Some lenders may only offer a maximum of $5,000, while others offer consolidation loans up to $30,000. After all, if you are considering a debt consolidation loan, chances are you have more than $5,000 in debt to consolidate.
Additionally, the lender should have a somewhat flexible range of loan terms, although some are rather stringent. The best companies to consider will offer short- and long-term loans, anywhere between 12 and 72 months or sometimes longer.
A debt consolidation lender should offer competitive interest rates, although the rate will vary depending on your credit score. Some lenders may charge a loan fee based on a certain percentage of the loan, but you should compare the fees charged by each lender to make sure you are getting the best deal. Also, be sure to pay attention to details, such as an increase in the interest rate if you make a late payment, and if there is a grace period for late payments.
Reputable debt consolidation loan lenders will not require you to provide any personal information to provide you with loan information, such as how much you can borrow or what the interest rate and fees may be. If a lender asks for your information before offering terms of the loan, this may be a red flag and you may want to avoid that lender.
Debt Consolidation Companies to Consider
Lending Club is a great online resource to consider, and it is a legitimate website that millions of people use each year. This is a peer-to-peer lending site that offers a variety of lenders who have varying loan amounts, interest rates and loan terms that they offer to consumers. Loan amounts range between $1,000 and $4,000 with annual percentage rates (APR) ranging from 6% to 36%. Of course, the APR depends on your credit score, so if you don’t have the best credit, be prepared to pay a higher APR.
This online service is available to anyone living in the United States, except for residents of West Virginia and Iowa, because those states have banned online lenders from offering loans to their residents. The Lending Club is accredited with the BBB and has the highest possible rating, so you don’t have to worry about falling for a scam.
Some disadvantages of using Lending Club for your debt consolidation loan include a loan term limited to either a 36- or 60-month payment period, which can result in high monthly payments. Response is not immediate, so you may have to wait up to or more than a week to receive approval or funding of the loan. Although electronic withdrawals come with no charge, if you choose to make your monthly payments by check, you will be charged a $15 fee each time.
PersonalLoans.com is another online lending service that connects consumers to lenders throughout the United States. The loan amount maximum is $35,000, and the APR ranges between 5 and 36%. While Lending Club is specifically a peer-to-peer lender, PersonalLoans.com offers peer-to-peer loans, traditional bank loans and installment loans.
The disadvantages of using PersonalLoans.com is that it is only a referral service, so it can be difficult to identify the fees and APR of the loan you are interested in. Because of this, you should use extreme caution when using this website, and be sure you know the terms of the loan before you sign any agreement. In some cases, you may have to submit a request through the website and wait for a lender to contact you with the loan details.
You may want to consider using Avant if you have a low credit score, as they tend to be more lenient for consumers who don’t have good credit. They also tend to approve and dispense the loan more quickly than Lending Club and PersonalLoans.com. Most loans are approved and dispensed within one business day. The loan amount available is between $1,000 and $35,000, with APRs ranging from 10 to 36%. This is the highest minimum APR of the three companies discussed here.
Avant is also accredited by the BBB with the highest possible rating, so rest assured you will be working with a legitimate company. This service is available in most of the United States and in the District of Columbia.
Other Options to Consider
There are other debt consolidation lenders to consider, but most have certain limitations or restrictions to qualify for a loan. Some may consider factors in addition to basic details such as your credit score or income.
Upstart is another lending service offering debt consolidation loans, or loans for any other reason. If you are younger or have a short or minimal credit history, this may be the right lender for you, although you will need to have at least an undergraduate degree. They consider your job history, college degree and even your grade point average (GPA) and test scores. Upstart offers peer-to-peer loans with APRs varying from 6.7% to 24.6%. The maximum loan term is 36 months.
If you have what is considered bad or poor credit, you may want to consider OneMain, an online lending company that also has in-store locations across the United States. They are accredited with the BBB and have an A+ rating. There are some states that prohibit OneMain and other lending services, but you can check online to see if you qualify for this lending service or not.
LightStream is owned by SunTrust Bank, and it offers debt consolidation loans between $5,000 and $100,000 with APRs ranging between 5.5 and 14.4%. You can qualify for a lower APR if you choose to use their electronic AutoPay system. Loan terms range from 2 to 7 years, and there are no other fees associated with the loan. Sounds great, right?
The LightStream loans are extremely reasonable, but they have extremely high eligibility requirements as well. You will need an excellent credit score and significantly high income and assets. If you are searching for a debt consolidation loan, chances are you don’t have the best credit score, but perhaps in some cases, this type of loan would be possible.
If you have a credit score of at least 640, then you may consider using Prosper for your debt consolidation loan. In addition to your credit score, they will consider your income and other financial factors to determine your eligibility. Loan amounts range between $2,000 and $35,000 with APRs ranging from 6% to 36%. There is also an additional loan fee of between 1 and 5% of the loan amount.
Finding the Right Debt Consolidation Lender for You
If you are already overwhelmed by your debt, the multiple lending options may seem to compound that feeling. Now that you have some more information and details about your lending options, you have to find the one that will work best for you, and the one that has the lowest fees and interest rates.
Know Your Finances
Before you look further into a debt consolidation lender, it is important to know your financial status. For example, you can use a credit card payoff calculator to determine if you could pay off debt faster with a loan. You should know your credit score and be familiar with your credit report. This will allow you to make a better choice when selecting a debt consolidation lender. Each time a lender checks your credit, it is reflected on your credit report as an inquiry. If you have too many inquiries, it can negatively affect your credit score.
Once you know your credit score, you can begin to eliminate some lenders and focus on the ones that are more likely to approve your loan. You may want to look over the above descriptions of each lender a few times to identify the one that best fits your financial situation. If you have a low credit score, don’t worry. There are lenders who will be willing to approve a debt consolidation loan, but be prepared to pay a higher interest rate.
Regardless of your situation, if you decide to pursue a debt consolidation loan, you should know the loan details, fees and terms before you sign the loan agreement. Although you may feel secure that you are using a reputable lender, you still need to make sure you can afford the monthly installments to avoid defaulting on your loan. Be sure to consider all available options before you make your final decision. Once you sign for the loan, there is no going back.
Making an informed decision is the best thing you can do for your finances. Although it may take several years, eventually you will be debt-free. During this time, it is also important to use credit cards responsibly, and develop a budget to avoid falling back into debt. If possible, eliminate your use of credit cards altogether.
Financial Advisor, DCL
Claire is a noted financial writer and author of hundreds of articles about personal and business finance. Before getting her MBA, she graduated with a BS in Economics. Her coursework focused on the different ways that debt, debt structure, and debt restructuring affect micro and macro-economic issues.
Upon graduation, she took a job at an investment bank that worked with municipal and county governments to help them reorganize and structure their debt so they could continue to provide essential city services.
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