It was an empowering day—the day you got your first credit card. Maybe you got it to build your credit history or rack up travel points. Having the financial flexibility to buy something without keeping an eye on a checking account balance gives us a sense of independence. But the day your interest charges start to exceed the purchases and payments you’re making on your credit card, you may want to take a moment to pause and reassess. If you’re suddenly overwhelmed by your credit card bill and struggle to manage other payments month to month, you might want to look into how to get a debt consolidation loan.
Guess what? You’re not alone. When it comes to managing a credit card or sources of debt, many adults aren’t equipped with the proper knowledge and habits to make sure things don’t snowball out of control. According to Debt.org, consumer debt reached $14.56 trillion at the end of 2020. In addition, Experian reported the average American credit card balance was $5,313, the average student loan debt was $38,793, and the average auto loan debt was $19,703.
Do you see where we’re going with this? Managing debt is probably one of the most significant challenges in modern America. But don’t worry. There are ways to get your finances under control and start down the path of financial health and wealth.
Providing tools and resources to help you take control of that debt now is one of BrightUp’s primary goals. We also offer “compassionate capital” for employees of companies who have implemented our financial benefits. Compassionate capital provides access to money when you need it most, regardless of your credit score. Through our Emergency Loan and Debt Consolidation Loans, families can access cash quickly or refinance expensive debts. Together, these tools uplift employees and their loved ones by growing their net-worth and improving their self-worth.
If you’re feeling overwhelmed by your current level of debt, there are solutions out there for you.
Everything You Need to Know About Debt Consolidation Loans
So what exactly is a debt consolidation loan? This type of loan refers to getting a personal loan that can combine and pay off debts from various creditors. The goal is to make paying off the debt more manageable. Often, the debt consolidation loan offers a lower interest rate and simplifies juggling a lot of monthly payments into one.
A debt consolidation loan is typically a better option than a balance transfer credit card, which can come with higher interest rates. For example, at the end of 2021, the Federal Reserve reported that the average credit card interest rate during Q3 was 15.8%, while the average personal loan rate was 9.39%. Rates like these are primarily for consumers with high credit scores.
The annual percentage rate (APR) would be much higher for consumers applying with an average or below-average credit score. In addition, transferring your balances to a high interest-rate credit card could end up snowballing your debt further.
According to CNBC Select, the average debt consolidation loan is between $12,000 and $14,000. Imagine how much money consumers can save for the future with manageable interest rates on those balances. The numbers speak for themselves. A debt consolidation loan is a great option to get a lower interest rate and pay off your debt more manageable. In addition, the sooner you can get out of debt, the more you can invest in more assets that grow your wealth.
What Kind of Debt Can Be Consolidated?
When it comes to consolidating your debt, be aware that some types of debt qualify for a debt consolidation loan, and some don’t. All unsecured debt, and certain types of secured debt, can be consolidated.
How do you know if a debt is secured or unsecured? Unsecured debt means the creditor solely depends on your promise to pay off the debt. Think credit cards and medical bills. A secured debt relies on an asset that can be used as collateral if you do not make your payments. An excellent example of this type of debt is a car loan or mortgage. The lender can take the property back if there are too many missed payments to recoup their losses.
Debts that qualify for consolidation include:
- Credit cards
- Retail or department store card bills
- Student loans
- Unsecured personal loans
- Payday loans
- Personal lines of credit
- Medical and hospital bills
- Late rent
- Short pay mortgage balances
- Income taxes
Some other that can qualify for consolidation, based on unique situations or state laws:
- Court judgments that have not been enforced
- Rent owed to a landlord
- Home improvement loans
- Auto repossession overages
Make sure to ask a lender about these types of debts if you want to add them to a consolidation.
How to Know if Debt Consolidation is Right for You
There are a few other factors a borrower should consider when choosing to pursue a debt consolidation loan. First, it’s essential to consider your individual or family’s financial situation and your financial goals for the future. For example, are you able to adjust your budget to manage payments? Do you need to make a long-term savings plan for your children’s education?
Recognizing short-term and long-term financial obligations will help you weigh the speed at which you want to get out of debt. When considering a debt consolidation loan, you’ll want to have a clear picture of where you are and where you want to go.
Review Your Debt’s Balances and Interest Rates
First, take a look at your debts. Are the obligations you want to consolidate in the list? If they are, and you have high interest rates attached to those debts, you can likely find a lower interest rate from a debt consolidation loan.
Think about it this way: say your credit card has a 21% APR and you have a $5,000 balance. Suppose you commit to not borrowing any more on the credit card and budget $200 a month to pay down the balance. By the time you pay off the $5,000 over the next 33 months, you’ll also pay an additional $1,499 in interest. What could you do with that $1,499 if you could hold onto it? Deposit it into a 401k? Add it to a savings account for your child’s college education? The possibilities are endless.
Debt Payoff Scenarios
If the debts you’re concerned about are listed below, you may need to consider an alternative route. But, first, we suggest talking with your lender to see if any programs make your payments more manageable.
Debts you can’t include in a consolidation:
- Home loans
- Home Equity Line of Credit (HELOC)
- Auto loans
- Boat loans
- RV loans
- Government loans
- Lawsuit settlements
- IRS debt and back taxes
To get organized, write down key details about the debts you’d like to consider consolidating. Here’s a helpful checklist of things you may want to include:
- Debt type – Identify whether they’re credit cards, loans, unpaid bills, etc.
- Lender information – Write down the name of the lender and account numbers.
- Current balances – Calculate your current balances and any principal that you owe.
- Current interest rate – Calculate the average between rates to see how low of an interest rate you’ll need.
- Is the interest rate fixed or variable? – Get a better understanding of how predictable your payoff plan could be.
- Is there a set timeline for repayment? – While a credit card has revolving credit, other debts may have a more restrictive repayment plan.
This information will be your greatest reference when taking the next steps to find a debt consolidation loan.
Review Your Financial Health
Now that you know whether your debts are qualified for consolidation, look at your financial standing. Debt consolidation loans are considered personal loans, typically requiring a good credit score to get approved.
We talk more about understanding your credit score and how to improve your report in this helpful article!
If you find that you can’t get approved for a loan, some organizations offer options. Remember the compassionate capital we mentioned earlier? The BrightUp Debt Consolidation Loan can help you unlock wealth for your family by refinancing your expensive debts at affordable rates. Everyone who has been in good standing with their employer* for more than 12 months is eligible for the loan.
Weigh the Pros and Cons of Consolidation Loans
There are several clear benefits of refinancing your current debts and combining them into a debt consolidation loan. Still, it’s important to review the cons too. When making a big financial decision, you want to be as confident as possible in your choices.
Pros of Debt Consolidation:
- Reduce your interest rate
- Lock in a low, fixed interest rate
- Have a clear repayment plan
- Improve your credit score
Cons of Debt Consolidation:
- You might face a higher interest rate
- If your repayment term is too long, you could spend more on interest charges
- Consolidation loans may require additional fees
- You might put assets at risk
The pros and cons may seem a little contradictory. However, it all comes down to your credit score, ability to pay off the loan within a specific time frame, and having access to a program that does not require collateral. You can avoid these cons by taking the time to find a debt consolidation program that aligns with your values and supports your current financial situation.
With BrightUp, a debt consolidation loan can unlock wealth with broader access and affordable interest rates. A debt consolidation loan can allow you to pay off your borrowed balance, including interest and principal. Instead of paying another 21% on borrowed money from multiple lenders, families now have the chance to free up that money to invest in other areas of life. We designed the program to make it easy to pay off the consolidation loan with paycheck deductions and autopay options.
Debt consolidation loans are an excellent option for borrowers juggling various unsecured debts with high interest rates. While most lenders prefer to work with those with higher credit scores, great opportunities for compassionate capital are out there.
How to Apply for a Debt Consolidation Loan
If the credit card scenario resonates with you, acquiring a debt consolidation loan is the next move. It’s time to stop going with the status quo of paying a minimum balance and racking up interest instead of freeing up your finances to invest in your growth. If you took the time to review your finances and compile your debt information, the following five steps should be easy.
Knowing your credit score will give you much more confidence in choosing the right lender for your debt consolidation loan. Services like Experian and Equifax will provide you with a free credit report without adding a “hard inquiry” to your credit history. Writing down all your debt information will help you quickly calculate your loan amount, ideal interest rate, and optimal repayment timeline. It’s the perfect cheat sheet when reviewing your options.
Shop Around for a Lender
When shopping for a lender, nothing is more important than finding a lender that values the same things you do: your financial wellness. Prepare to protect yourself from predatory lenders, and don’t settle for a deal that doesn’t make you feel confident. You deserve to work with a lender you can trust and has your best interest in mind.
When looking for a debt consolidation loan, you’ll run into four types of lenders:
- Online lenders cater to borrowers with a broader range of credit scores. Be warned many online lenders may pair loans with hidden fees or costly interest rates.
- Bank loans typically work best for those who have a pre-existing relationship with a bank if you’re applying for a debt consolidation loan. Bank loans work best for those with good credit and reliable history. However, community banks tend to be more open to lending to a wider range of credit scores.
- Credit unions often offer lower rates to borrowers with lower credit scores. However, you have to be a credit union member to apply for a loan.
- Financial benefit providers give employees greater access to financial tools like debt consolidation loans.
Some lenders will allow you to pre-qualify, but don’t be tempted to jump in head-first. Review all of the fine print before you decide to apply. First, review the annual percentage rate. Is it lower than the average of your current rates? Calculate the monthly payment. Do you think you can comfortably afford the monthly payments even if a financial emergency arises? How long is the payback term? Answering these questions can help you calculate the total cost of borrowing. If the offer allows you to free up extra money to build your wealth, it could be the one!
Submit Your Application
Once you’ve found an ideal lender, it’s time to apply! The steps you’ve taken to prepare should make this process easy. An applicant will be required to provide the following information:
- Proof of identity
- Proof address
- Proof of employment status
- Education history
- Income details
- Social Security number
This information provides lenders with a complete picture of your current financial standing and your ability to repay your debt. Some lenders may give you a same-day approval. Others may ask for additional information and take a little longer to provide an acceptance or rejection.
Close the Loan and Distribute Payments
If your application is approved, you’ll then sign a loan agreement. How quickly you receive the money depends on the details of the loan agreement. Some lenders offer to pay the creditors directly, while others deposit the lump sum into your bank account. In this case, you will have to pay the balances yourself. Don’t waste any time on this! Each day, additional interest may accrue on your debts.
Another quick tip: opt for automatic payments or paycheck deductions. Choosing one of these payment methods can ensure your payments are made on time every month. Every month paid on time is an opportunity to improve your credit score!
What to Do If a Lender Rejects Your Application
Receiving a rejection letter for a debt consolidation loan never feels good, especially if it results in a hit to your credit score. However, if you’ve exhausted all your options for debt consolidation, there are a few alternatives you may need to consider.
With BrightUp, a debt consolidation loan can unlock wealth with broader access and affordable interest rates. A debt consolidation loan can allow you to pay off your borrowed balance, including interest and principal. So instead of paying another 21% on borrowed money from multiple lenders, families now have the chance to free up that money to invest in other areas of life. The program also makes it easy to pay off the consolidation loan with paycheck deductions and autopay options. We like to think of it as a financial wellness tool, more than a finance product.
If your employer isn’t currently offering financial benefits with BrightUp, other lenders can offer similar options. The FTC also recommends exploring the following options:
- Debt management plans require that you work with a credit counselor to formulate a repayment plan you can manage. The credit counselor will then negotiate with your creditors on your behalf. The goal is for the creditor to agree to a lower monthly payment or interest rate that aligns with your repayment plan.
- Create a budget centered around making your debt payments more manageable. Look for other areas to reduce your spending to accommodate these financial priorities. If possible, use strategies that allow you to pay down your most considerable debt first, reducing the amount of interest you’re paying.
- Bankruptcy can be a last resort if neither option is feasible. Bankruptcy will help you find relief. However, it will remain on your credit file for the next seven to ten years. This choice is likely to affect your ability to access credit in the future.
Next Steps to Help Manage Your Debt
Even if you can acquire a debt consolidation loan, stay focused on using this as an opportunity to grow your wealth. As your debts decrease, your net worth will increase. Over time, you can take the returns from reducing the amount of interest you had planned on paying and put it toward a goal that aligns with your values.
At BrightUp, our mission is to help workers and their loved ones learn the skills they need to become more financially flexible and grow their wealth. We do this by partnering with employers to provide financial benefits like access to capital, financial planning, personalized financial education, and coaching from experts. If you believe our programs could benefit your workplace, explore our solutions and contact a BrightUp Representative for more information at firstname.lastname@example.org or call us directly on (833) 513-1302.
*Employer must be an active partner with BrightUp financial benefits.