What is a Debt Consolidation Loan?

A debt consolidation loan is one way to refinance your debt. You can apply for a personal loan for the outstanding amount of money you owe and use the loan to pay off your balances. This loan is then paid back over time.

Debt consolidation loans are a popular way to roll various forms of high-interest debt into one single affordable payment. Debt consolidation may lead to a lower overall interest rate.

How does a debt consolidation loan work?

Debt consolidation loans are installment loans with a standard personal loan rate and the added benefit of allowing you to merge your debts and make a single, more manageable monthly payment, ideally with a lower interest rate than the average interest rate of the specific debts. Consolidating debt is a major incentive for a lot of consolidation loan users as they look to reduce debt, build their creditworthiness and save money.

Imagine you have three credit cards with different balances and different interest rates. This can not only become confusing, but it can also be expensive if you miss payments or pay late.

A debt consolidation loan can be a solution to this. You can use the loan to pay off the credit card balances and interest rates, then make one monthly payment to a fixed amount, with no fees or bad surprises. Fixed payments also allow you to know when the loan will be paid back in full.

Benefits of debt consolidation loans

Getting a loan to consolidate debt comes with several benefits:

• Pay off your debt faster: Personal loans can be helpful for you if you have many minimum payments. Debt consolidation loans may help you pay off debt faster, depending on your loan terms, your monthly budget, and the interest rate you qualify for. You may be able to save money on interest and pay off your debt faster than you would with minimum payments on each individual credit card or other loan. Saving money on interest and avoiding late fees or missed payments can also make repayment much more manageable.
• Simplicity: Debt consolidation can streamline all accounts you want to consolidate into one single payment. This provides clarity in knowing exactly how much you owe and when each month. Second, it offers a way to calculate exactly when you will be debt-free.
• Fixed repayment: Many debt consolidation loans are fixed installment loans. This may help with budgeting. If you provide stability in knowing exactly how much you will owe each month. Second, it offers a way to calculate exactly when you will be debt-free.

Risks of debt consolidation loans

Debt consolidation loans do have some downsides:

• Temporary credit score change: Applying for a debt consolidation loan may lead to a hard inquiry on your credit score. This could temporarily decrease your credit score, but remember: consolidating high-interest debt could likely improve your score over time.
• High interest rates: If your credit score is low, a debt consolidation loan is often not the lowest interest rate. You could still take a high rate. If your credit score is low, you may not qualify for a loan. For some, it is difficult to obtain the best interest rate. If you do not qualify for a good loan, it is unlikely to save money or interest will accumulate. Be sure to consolidate your debt into an affordable monthly payment that allows you to pay back your debt quickly and avoid extra fees.
• Bad spending habits may continue: Debt consolidation does not solve financial trouble. If you continue to overspend, you may end up with more debt. If you are only doing debt consolidation to avoid paying your debts, consider other options. You may need to address your spending and financial habits before consolidating your debt.

How to apply for a debt consolidation loan

Applying for a debt consolidation loan can feel overwhelming. You can manage the process by being thorough with your preparation and research. Here are some steps to help you apply for a debt consolidation loan:

• Check your credit score and report: Make sure you meet the lender’s approval for a loan. If the score is not high enough, work on improving your credit score before you apply.
• Review your budget: Make sure you can afford the monthly payment. Add up your current loans and all debts to see what you can pay each month. A debt consolidation loan is only helpful if you can afford the payment and pay off your current loans. Add all debts and monthly payments to see if you can afford the new payment.
• Gather documentation: Lenders will ask for proof of income, employment, and other financial documents. You can prove your ability to repay the loan and get a debt consolidation loan with all paperwork and documentation ready when you need it.
• Identify which debts to consolidate: Not all debts should be consolidated. Some debts may have lower interest rates or better terms. You can only consolidate certain debts, so make sure you know which debts you want to consolidate before you apply.

You can get a debt consolidation loan from banks, online lenders, credit unions, and more. It is important to research and compare rates, loan terms, and fees for debt consolidation. Compare interest rates, loan terms, fees, and other details before you apply.

Debt consolidation loan interest rates

Interest rates on debt consolidation loans can vary, with the potential for both higher and lower rates. In general, having a higher credit score tends to increase the likelihood of securing a more favorable rate.

Your lender will look at the details of your credit score and financial situation. Other details can be loans with existing consolidation and payment history. Your income also helps the lender find a solution with a consolidation loan. The lender will want to make sure you make enough money to pay back the loan.

What to do if the loan application is denied

There are several reasons why your debt consolidation loan application could be denied. Your credit score may be too low. Maybe the lender believes your income is not high enough to cover the loan. A lender may deny a loan application if they feel you have too much debt and pose a risk.

If your debt consolidation loan application is denied, there are steps you can take.

• Work to improve your credit score and find ways to cut down on your spending and increase your income.
• Build a budget to ensure you can afford your debts. Consider financial pooling or employing a debt consolidation loan.
• Seeking guidance from a credit counselor is an excellent way to assess your debt and learn how to improve your financial situation.

Frequently Asked Questions

Which types of debt can I consolidate?

There are several types of debt you can consolidate. One of the most popular debts to consolidate is credit card debt. Unpaid medical debt and payday loans can also be consolidated in some cases.

You can also consolidate student loans. While it is possible to have more monthly student loan payment, some students take out new loans each semester. This can cause student loan debt to pile up. Debt consolidation is an option in this scenario but be sure to review your loan terms and conditions. There are also federal benefits, such as reduced interest rates and flexible repayment schedules for consolidating only private student loans.

High-interest personal loans can also be consolidated. Consolidating expensive personal loans into more affordable monthly installments can make sense, especially when consolidating installment loans will not lower your credit utilization rate.

What is the minimum credit score for a debt consolidation loan?

It is always a good idea to have a higher credit score in order to secure a lower interest rate on your debt consolidation loan. However, some lenders allow scores below a negative rate (e.g. 720). Some lenders may even go as low as 600.

How much debt do I need to consolidate?

The amount of debt you need to consolidate varies from person to person. Loan amounts also vary, but lenders can offer anywhere from $2000 to $30000. The amount you receive will depend on your credit score and financial situation.

How is a debt consolidation loan different from a credit card?

A balance transfer credit card usually offers a 0% APR (annual percentage rate) balance for a limited time, allowing you to pay your debt without accruing interest for a predetermined introductory period. However, if you fail to pay back the balance before the introductory period ends, the interest rate will be much higher than the rate you would get with a debt consolidation loan. If that happens, you may end up with more debt than you started.

How long does it take for a consolidation loan to get approved?

In most cases, approval for a debt consolidation loan can be instant. In others, it could take up to several weeks or even business days to complete the entire process. The amount of time it takes to get approval depends on the lender and your financial situation.

Bottom Line

Debt consolidation loans can be a huge help. They can simplify your outstanding balances, lower your interest rate, and allow you to pay off debt faster. They can also help you avoid late fees and financial frustration. Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi.

This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.