How Do I Choose the Best Debt Consolidation Lender?

If you are looking for ways to consolidate your debt, there is no shortage of lenders who can help. However, not all are worth considering if you are serious about meeting your debt-repayment goals.

Ideally, you should start by deciding which debt consolidation method is best and assess your financial and creditworthiness to determine if you are a good fit for debt consolidation. Once you have taken these steps, you can proceed to research and evaluate lenders to find the best solution that will help you pay off those overwhelming debt balances sooner.

Find out which type of debt consolidation is best for you

The first step is to evaluate the debt consolidation options and choose the method that works best for you. Common methods include:

  • Private loan: Many lenders offer debt consolidation loans, or personal loans, designed to help you pay off debt faster and save a bunch on interest. Debt restructuring loans usually have a fixed interest rate and a term of one to 10 years. You are free to use the funds as you see fit, but the idea is to use the loan proceeds to pay off your outstanding debt.
  • Zero APR Credit Card: Also known as transfer credit cards, these debt products can also help you save a significant amount on interest and eliminate high-yielding debt balances sooner. They are generally reserved for consumers with good or excellent credit. You should only consider this option if you can also withdraw your credit transferred to the card during the introductory period. Otherwise, you could end up paying a fortune in interest.
  • Home Loans: You can convert up to 85 percent of your property’s equity into cash and use it to consolidate debt with a home equity loan. It acts as a second mortgage and has a term of between five and 30 years. The interest rate is also fixed and lower than most credit cards, but the main downside is that these lending products are backed by your home. Consequently, if you default on loan payments, you could lose your property in foreclosure.
  • Homeowner’s Line of Credit (HELOC): A HELOC is a type of home equity loan, but you don’t receive the loan proceeds in a lump sum. Instead, you get access to a pool of cash to draw from as needed throughout the 10-year draw period. Most HELOCs also only require interest payments during the draw period. In the end, you pay back in monthly installments over a term of up to 20 years. The monthly payment amount can fluctuate since the interest rate on HELOCs is typically variable.

Determine your qualifications

Lenders want to know that you are creditworthy and have the funds to make timely payments on the loan or credit card you are using for debt consolidation. So you can expect the lender to evaluate your creditworthiness, credit history, and debt-to-income ratio to determine if you qualify for a loan product.

Also note that the most competitive interest rates are generally reserved for borrowers with good or excellent credit. A lower credit score does not always mean that you will automatically be denied a loan or credit card. Still, you typically get a high rate of interest when approved to offset the risk of default for the lender or creditor.

You may also find that consolidating your debt doesn’t make sense if you have bad credit if you’re only eligible for a higher interest rate than you’re currently paying.

Look for lenders

Look for lenders that offer the type of debt consolidation you are looking for. Most offer online pre-qualification with a gentle credit request. If you’re considering a debt consolidation loan, you’ll also get a little insight into the potential cost of the loan so you can more effectively compare your options.

Pre-qualifying takes the guesswork out of finding lenders willing to work with you. Additionally, you avoid applying to lenders who might refuse you a loan or credit card and avoid making unnecessary tough loan requests.

Evaluate the lender

Once you have a shortlist of at least three lenders, you should look for the following:

  • Annual Percentage Rate (APR): This number represents the actual annual cost of borrowing for the year. It includes interest and fees and is determined by your credit rating and debt-to-income ratio.
  • Lender Fees: Some lenders charge processing fees that range from 1 percent to 10 percent of the loan amount. Even if the APR is on the low end, a high processing fee could make another lending product a more practical choice.
  • Characteristics of the lender: The best lenders also have an online dashboard where you can monitor your account, schedule payments, and chat with customer service representatives. It’s also ideal when free educational resources are available to help you manage your credit score and overall financial health more effectively.

bottom line

Before applying for a debt consolidation loan or credit card, weigh your options to decide which type of debt consolidation makes the most sense. Also, get pre-qualified with at least three lenders to see potential loan offers and compare your options. That way, you can make an informed decision, reach your debt-payment goals faster, and save money.

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