What is a Debt Consolidation Loan?

A debt consolidation loan is simply a process by which you use one source of money to pay off the balance owed to multiple debtors. So, for example, you could have three credit cards with outstanding balances, a student loan, and a personal loan, all with balances that need to be partially paid out each month. A debt consolidation loan takes care of all of these debts and rolls them up into a single, more manageable monthly payment that can be lower than the previous payments you were making combined. When done right, debt consolidation loans can help clear up your debt and potentially improve your credit over time.

What are APRs, and How Will a Lower One Help Me?

APR is an acronym for annual percentage rate. It combines the charges, fees, and payments to tell you the grand total of what your loan will cost you per year. The lower the APR, the less you are going to pay in the long run.

APR is one of the most important factor to consider when comparing and considering debt consolidation loans. APR is not exactly the same as interest rates. Here's the main difference:

• Interest rate: The percentage you’ll be charged by a lender for supplying you with a loan
• APR: Includes the interest rate AND any fees charged by a lender when taking out a loan

So, an APR really gives you a broader scope of how much it’ll cost you to take out a loan. What this means is that the lower the APR you can get, the less you’ll be paying out over the life of your loan. In short, a lower APR means less money paid out of your pocket. That’s good news for the borrower.

The APR calculation on personal loans will vary depending on your lender, but it will typically be lower than what you would receive from a payday or short-term loan – usually starting at 3% and capping at 35.99%. It is not ideal to owe any money, but if you require a loan, then a personal loan could be a viable option.

APR rates mentioned include associated fees.

Full repayment for the loans displayed range between 61 days to 180 months.

Representative example: assuming a loan of $10,000 over 60 months at a fixed rate of 3.1% per annum and fees of $60.00. This would result in a representative rate of 3.3% APR, with monthly repayments of $180.80, for a total amount paid of $10,868.00.

How Does a Debt Consolidation Loan Work?

Debt consolidation loans are convenient for people, whether you’re good at math or not. If the numbers have got your head spinning, here’s how it works:

Let's say you have 3 credit cards on which you owe $1000 each.

Three credit cards X $1000 each = $3000

You also have $55,000 in student loans to be paid off and a private loan that you took out (to fund a dream destination vacation to the Bahamas) for $15,000. That’s another $70,000 in outstanding loans.

Each month, you’ll have to pay out a certain percentage (according to the minimum payment requirements and the APR subject to the specific loan) of the amount owed to each lender. So, you might have to pay out $100 to American Express, $100 to Visa, and $100 to MasterCard. Then, you also have to pay $200 towards your student loan and another $100 towards your private loan.

Altogether, these payments come out to $600 per month. The payments are deducted from your overall balance, and this continues until you’ve paid off the entire debt amount. Now, here’s how it works when you introduce a debt consolidation loan into the picture.

• You take out a new debt consolidation loan for the full amount of your debt, $73,000.
• You pay off your entire credit balance for each of the three credit cards: $1,000 to American Express, $1000 to Visa, and $1,000 to MasterCard.
• You pay off your entire student loan: $55,000.
• You pay off your entire private loan: $15,000.

Note: The example above is for illustrative purposes only and is not meant as financial advice or instructions. You are encouraged to speak with a professional financial advisor to help determine the best solution for your specific debt needs.

Now, you're debt-free, right? Sort of. You have no more outstanding debt. The only thing you have to pay off now is your debt consolidation loan. So, instead of having to make five individual payments each month, you've shrunk your debt repayment requirements down to a single monthly payment. That is helpful in two ways:

1. You only have to pay off a single debtor, so your monthly payments can end up being significantly less than if you had to keep five individual lenders happy.
2. You alleviate the headache of having to juggle five different payments with five different amounts, payment schedules, due dates, fees, and more. One payment is much more manageable mentally than five.

What’s more (and often most important), you could end up paying less all around because you have lowered your interest rate.

Choosing the Best Debt Consolidation Loan Company: Factors to Consider

Factor in details about a debt consolidation loan provider, such as:

• Is offering a lower interest rate (and APR);

One of the most important features is the APR. With a lower interest rate, you can end up saving considerably on your debt consolidation loan. With a higher one, you’re shooting yourself in the one good foot you have to stand on.

• Has experts to talk to;

Most of us don't know very much about finances and how these things work. For that reason, it can be advantageous if you find a debt consolidation loan lender that will walk you through the whole process, answer any questions you have, explain all the terms, and be clear with you about any details that are murky.

• Is flexible;

Repayment terms, prepayment penalties, late payment fees, and more will vary from one lender to the next. Find a lender with flexible terms that you can work with for the most pleasant borrowing experience.

When to Consider a Debt Consolidation Loan

A debt consolidation loan could be the right idea if you:

• Are struggling with multiple types of debt
• Want to increase your credit utilization ratio
• Want to build your credit by diversifying

Of course, it is also worth noting when it's NOT a good idea to take a debt consolidation loan. If you are currently in major credit card debt due to irresponsible spending and you don't intend to change these habits, walk away. While a debt consolidation loan can help alleviate your debt, it will only work if you have every intention of taking a more responsible course of action in the future. Clearing your debt quickly leaves a tempting void on your credit line, freeing up that line to more spending. If you aren't careful, you could easily find yourself in even greater credit card debt than before you started.

Disclaimers

Upstart

* If you accept your loan by 5 pm EST (not including weekends or holidays), loan funds will be sent to your designated bank account on the next business day, provided that such funds are not being used to directly pay off credit cards. Loans used to fund education-related expenses are subject to a 3 business day wait period between loan acceptance and funding in accordance with federal law.

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