Are There Any Legitimate Debt Consolidation Loans?

debt consolidation

When you have debt, it’s not uncommon to feel that it is insurmountable. The bills keep coming in the mail and you begin to wonder what options there might be for help getting out of debt. One of the methods people often turn to – to make debt more manageable – is debt consolidation. While it’s not the right choice for everyone, debt consolidation can be helpful for some people.

Consolidation can put all your debt into one loan so that instead of keeping track of several debt payments each month you only need to make one payment. And it can lower your interest rate. But there are some predatory companies out there that advertise “debt consolidation” and charge lots of unnecessary fees. So how can you get a legitimate debt consolidation loan? And is there even such a thing? Below we’ll examine these two questions.

The Main Types of Debt Consolidation

There are a few ways of doing debt consolidation. The first is the most common and most straightforward: you take out a debt consolidation loan from a lender and replace all your previous debts with a larger loan (hopefully with a lower interest rate or better payment terms). Since a debt consolidation loan generally comes with one interest rate and one payment, it can make it easier to pay down and can also possibly save you money.

But where do you get a debt consolidation loan? One place you can go is your local credit union or bank. If you have a relatively good credit score, they will often be happy to give you a debt consolidation loan. Another place you can go is a peer-to-peer lender. Peer to peer lenders, such as Prosper and Lending Club, use investments from individuals to fund consolidation loans to other individuals (you can get pre-qualified for these lenders with our debt consolidation tool). This is especially powerful if you have high-interest debt (a $10,000 credit card balance at 20% interest, for example). The loan you get from a peer-to-peer lender will usually be at a lower interest rate and will make it easier to pay off your debt.

(Users of ReadyForZero can automatically be eligible for such loans through the Savings Platform)

Another type of debt consolidation is the kind that’s advertised by debt management companies and practiced by credit counselors. In this method, you let the organization manage your debt repayment. This is where you have to be very careful, because some companies take advantage of people. Usually, with reputable organizations, you make a payment to the organization, and the money is distributed to your creditors.

A third option is doing a credit card balance transfer, in which you open a new credit card and move your existing balances to that new card. These balance transfer cards typically come with an offer of 0% interest, at least for the first 12-18 months. Just be sure to read the fine print when signing up for these cards – and try to pay off the balance in the “introductory” time period if possible.

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Secured Debt Consolidation Loans

In addition to the options mentioned above, there are also secured debt consolidation loans. These generally depend on using your home as collateral for the loan, which can allow you to secure lower interest rates but also places your home at risk of being foreclosed on if you do not pay back the loan. That is the major downside – using any type of secured debt consolidation loan means you could lose the asset, in this case meaning your house.

Any time you consolidate your debt with a loan, you need to be careful. Once you “clear out” your old debt accounts, it can be tempting to view it as “available money” and run up more debt. When this happens, you end up in worse trouble. Before you get any debt consolidation loan, it’s important that you change your financial habits and stop your debt spending, and ensure that you are committed to paying off your debt.

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  • Eddie J

    The problem with getting a credit card for balance transfers is that you never know how much of a credit limit you will get and if it will cover all the debt you want to consolidate or transfer to the new card. That happened to me. I had planned to get a new card and transfer the balances of my 3 old cards that totaled $7500. Problem was the new card gave me a $6000 credit limit, $1500 short of what I needed. When I asked if they could offer me more, they said no because I have the 3 other cards.

    • That must have been frustrating! I hope you were still able to make the best of the situation. But yes, it can be hard to know what kind of credit limit you’ll be approved for. That is definitely something people should keep in mind when making a decision about debt consolidation.

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  • Tinar Collett

    I have tried to apply for that consolidation loan with 3 different places, 1 of them was my bank I live in on for all 3, my credit score is woefully low, the only day I have in the entire world is $10,500. I want to pay it off because one of the company has put a lien on my social, and if I can’t pay it off before tax time they’re going to take my entire tax return. are there any companies that anyone knows of that would be able to offer me a debt consolidation loan with my low credit score?it seems to defeat the purpose its on a person down for a debt consolidation loan because the credit is bad.