- What is really a debt-consolidation loan?
- Debt-consolidation loan rates
- What factors affect my debt-consolidation loan rate?
What is a debt-consolidation loan?
A debt-consolidation loan merges multiple debts, like credit card balances, into one new loan, with one payment per month along with a potentially lower rate of interest.
Some debt-consolidation loans may be secured (just like a home equity loan) or unsecured (like a personal loan). With secured loans, the borrower is needed to provide collateral, just like a home or savings account, to secure your debt. The lender can take the focal point in fulfill the debt should you stop paying. But unsecured loans do not require collateral.
Will it will save you money with a debt-consolidation loan? Maybe. A lower interest rate, a longer loan term or a mixture of both could help decrease your monthly payment.
But should you extend the loan term and just make minimum payments, you may actually end up paying more in interest within the lifetime of the borrowed funds. Also watch out for additional costs and fees that you may have to pay as part of a debt-consolidation loan.
Debt-consolidation loan rates
Many factors influence debt-consolidation loan rates, including the type of loan you apply for. Generally, you can find lower rates of interest on secured loans than on short term loans.
As of August 2022, the typical interest rate on a two-year personal loan from a commercial bank was 9.34%, based on Fed data. But remember that personal loan APRs can range from 7% to 36%, depending on your credit along with other factors.
The average credit card interest rate by August 2022 was 16.43%, according to the Fed's data.
You’ll typically need strong credit along with a low debt-to-income ratio to entitled to the lowest rates.
Credit cards
Balance transfer charge cards allow you to move several charge card balances onto one charge card. These could come with an introductory 0% APR period, which often can last for a particular time period, typically within the selection of 12 to 21 months. You should try to spend the money for balance entirely throughout the promotional period because after the intro period is up, you'll have to pay interest and costs on the remaining balance.
Home equity loans
With a home equity loan, you can borrow a lump sum and repay it over time with interest. Because you’re making use of your home as collateral, hel-home equity loans offer lower rates of interest than other types of loans. But when you default on the loan, you could be vulnerable to losing your home.
What factors affect my debt-consolidation loan rate?
Several factors can affect your debt-consolidation loan rate. The kind of product you're looking at can dramatically impact your rates – for instance, unsecured loans have different rates and costs than charge cards. But several other factors can impact your rates as well.
Credit and credit scores
Generally, strong credit could help you be eligible for a lower rates of interest. But when you have a few recent missed or late payments in your credit reports, consider making the effort to operate on enhancing your credit before applying for any debt-consolidation loan. Remember, your credit is only one of many factors that may determine your interest rate.
The lender
Although you can find debt-consolidation loans at traditional banks, credit unions or online lenders, each may charge another rate. You can generally find lower APRs at credit unions when compared with traditional banks, but you need to be a member of a bank to apply for a loan from one. Some online lenders sell to individuals with poor credit. But rates of interest can differ widely, from around 6% as much as 36%, whereas the number is typically lower with a bank personal bank loan.
Debt-to-income ratio
Your debt-to-income ratio, or DTI, is when much of your monthly revenues (before expenses) that you simply put toward paying debts. Generally, lenders equate higher DTIs with higher risk. If your DTI is high – around 43% or more – you very well may find it hard to get approved for lower interest rates.
Loan term
A loan term may be the amount of time you need to repay financing. Generally, a shorter-term loan will offer you lower rates of interest and reduce your overall cost because you’re paying interest for any shorter period. Longer loans, however, typically offer higher interest rates and a higher total cost, but they could also mean a smaller minimum monthly payment.
Fixed vs. variable APR
A fixed interest rate may get a higher interest rate to start with, but is more prone to remain steady on your loan term. Variable interest rates may begin lower but could increase over time according to alterations in the market.
Bottom line
Multiple causes of debt-consolidation loans can make it difficult to pin down just one average debt-consolidation loan rate. You need to shop around to ensure you're comparing options for the credit product which works good for you. Applying for prequalification will help you have an idea of what loans and rates you may qualify for – keep in mind it doesn't be certain that you will be approved, or that the terms you're offered will be the same as those you prequalified for.
It's also important to address the way you wound up in debt – and in will need a debt-consolidation loan – to begin with. If you find it helpful, you may want to consider credit-counseling options if you're having trouble paying off debts.
