Debt consolidation is a process that involves taking out a single loan to pay off multiple debts. This can help you stay organized and potentially save money, especially when you have a lot of debt and you don't seem to be making any progress towards paying what you owe. A debt consolidation loan is one of the most common and easiest ways to consolidate debt. When applying for a debt consolidation loan, you will need to provide the lender with information about your current debts.
The lender will then use this information to determine the amount of the loan and the interest rate. Personal loans typically come with fixed interest rates and monthly payments. Once the loan is approved, you will receive the funds and use them to pay off your credit cards or other loans. In some cases, funds can be sent directly to your creditors.
From there, you will start making monthly payments on your new debt consolidation loan. These loans are unsecured, which means you don't need to put in a guarantee. A debt consolidation loan can be a good option if your credit rating has improved since you applied for your loans, or if you are overwhelmed by debts and have no hope of paying them off, even with reduced payments. However, if your debt burden is small, or if you can pay it off within six months to a year at your current pace and you would save only a negligible amount by consolidating, then it may not be worth it. Additionally, keep in mind that lenders such as SoFi do not offer direct payments to the borrower's other creditors. Paying off existing credit card debt with a balance transfer to another credit card is not likely to reduce your credit utilization rate like a debt consolidation loan would.
After your pre-existing debts are paid off with funds from your new debt consolidation loan, you will make a one-time payment on your new loan every month. If you are looking for alternatives to debt consolidation loans, below are some additional options you can consider:
- Increasing income with extra effort or otherwise
- Paying off some of your smaller, more manageable debts
- Using a balance transfer credit card
- Applying for a personal loan through your bank or other lender
- Using Marcus' pre-qualification feature with soft credit