What is a Personal Debt Consolidation Loan?

 A debt consolidation personal loan is a loan you use to pay off your debts, giving you a single, lower-interest loan payment that’s easier to stay on top of than having multiple debts. The way it works is your lender gives you a loan for the amount of all your debts combined. You then use the money to pay off your individual debts, which leaves you with only one payment to think about, usually with a lower interest rate. 

In theory, you could consolidate your debt with any loan that has a lower interest rate than your debts. Certain loans, however, are more commonly used than others to consolidate debt, like a home equity line of credit or a personal line of credit. We’ll look more closely at these below to help you decide which is the best for you. 



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Rates (%)

Interest rates on a debt consolidation loan depend not only on the type of loan you’re using, but whether it comes from a bank or a finance company. Lines of credit usually have the lowest rates around, which will be 1% above the prime rate. This means your rate will change over time, which could be good or bad, depending on how the market goes. That said, your rate is likely to be lower than any other loan on average. If the loan is secured, and your credit’s good, a line of credit can have a rate as low as 3%.


A home equity line of credit can also have rates that are as low as your mortgage, meaning somewhere around 4% – 5%, but this depends on your credit, the size of the loan, etc. 

As far as debt consolidation programs go, these usually have rates between 7-12% if they’re provided by a bank, while loans from finance companies usually have rates between 15-30% depending on whether they’re secured.

Credit Requirements

For most debt consolidation loans, you’ll need a decent credit score (around 680). You might be able to get one with a score below 680, but your rates would be so high that it wouldn’t likely be much help in getting out of debt. 

That said, just how good your credit score needs to be depends on a number of circumstances. How much money you’re asking to borrow, household income, and whether you can provide collateral are all aspects that can help lower the importance of your credit score.

Secured vs. Unsecured Debt Consolidation Loans


Securing a loan with collateral is a common way to bring down your interest rate. When it comes to consolidating debt, a low interest rate is almost essential, so securing a loan is likely something you’ll want to consider. But whether you’re better off with a secured loan or not is really something that depends on your circumstance. 


Common assets to secure a loan are savings accounts, your home, or your vehicle, and losing any one of these because you can’t afford your payments might not be worth a lower interest rate. That said, if you’re confident you can pay the loan back, and you have the assets to use as collateral, you might be better off taking advantage of the better loan terms that come with a secured loan. 


Debt Consolidation Loan Credit Requirements

Different lenders will have different requirements for getting a debt consolidation loan. In general, however, you can expect that a credit score of 660-680, and some significant collateral are essential to qualify. It’s also recommended that you compare the rates of as many different lenders as you can to make sure you’re getting the best deal possible. 

Alternatively, you might be able to secure a loan with a co-signer (a friend or family member willing to guarantee payments of your loan), though finding someone willing to take that risk could be difficult. Otherwise, credit counseling or even bankruptcy in some cases can be a safer option, since debt consolidation loans can just turn into new debt if you’re not careful. If you’re unsure of the right move to make, talking to an expert about your situation is always the best idea.


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