How to choose the best debt consolidation lender?

If you’re looking for ways to consolidate your debt, there’s no shortage of lenders who can help. However, not all of them are worth considering if you really want to reach your debt repayment goals.

Ideally, you should start by deciding which method of debt consolidation is best and assessing your financial and credit health to determine if you are a good candidate for debt consolidation. Once you’ve taken these steps, you can move on to researching and evaluating lenders to find the best solution to help you pay off those crippling debt balances sooner.

Identify the type of debt consolidation that suits you best

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

  • Personal loan: Many lenders offer debt consolidation loans or personal loans designed to help you pay off your debts faster and save a lot of interest. Debt consolidation loans usually come with a fixed interest rate and a loan term of 1 to 10 years. You are free to use the funds as you see fit, but the idea is to pay off your debt balance with the loan proceeds.
  • Zero APR credit card: Also known as balance transfer credit cards, these debt products can also help you save a significant amount in interest and eliminate high-interest debt balances faster. They are generally reserved for consumers with a good or excellent credit rating. You should only consider this option if you can repay the balances you transfer to the card during the introductory period. Otherwise, you could end up paying a fortune in interest.
  • Home Equity Loan: You can convert up to 85% of your home equity into cash and use it to consolidate your debt with a home equity loan. It acts like a second mortgage and comes with a repayment period of between five and 30 years. The interest rate is also fixed and lower than most credit cards, but the main drawback is that these loan products are secured by your home. Therefore, you could lose your property to foreclosure if you fall behind on loan repayments.
  • Home Equity Line of Credit (HELOC): A HELOC is a type of home equity loan, but you will not receive the loan proceeds in a lump sum. Instead, you’ll have access to a pool of money that you can withdraw as needed during the 10-year draw period. Interest-only payments are also required during the drawdown period on most HELOCs. Once completed, you will repay in monthly installments over a term of up to 20 years. The amount of the monthly payment can fluctuate since the interest rate on HELOCs is generally variable.

Determine your qualifications

Lenders want to know that you are creditworthy and have the means to make timely payments on the loan or credit card you are using to consolidate your debt. So, you can expect the lender to assess your credit score, credit history, and debt-to-equity ratio to determine if you qualify for a loan product.

Also, be aware that the most competitive interest rates are generally reserved for borrowers with a good or excellent credit rating. A lower credit score doesn’t always mean you’ll automatically be denied a loan or credit card. Still, you will usually get a high interest rate if approved to offset the risk of default posed to the lender or creditor.

You may also find that it’s not a good idea to consolidate your debt if you have bad credit if you only qualify for a higher rate than what you’re currently paying.

Shop around for lenders

Look for lenders that offer the type of debt consolidation you are looking for. Most offer online prequalification with a flexible credit application. If you’re considering a debt consolidation loan, you’ll also get an overview of potential loan costs to more effectively compare your options.

Being prequalified takes the guesswork out of finding lenders willing to work with you. Plus, you’ll avoid going to lenders who might deny you a loan or credit card and getting an unnecessary credit check.

Assess the lender

Once you have a shortlist of at least three lenders, here’s what to look for:

  • Annual Percentage Rates (APR): This figure represents the actual annual cost of borrowing for the year. It includes interest and fees, and it’s determined by your credit score and debt-to-equity ratio.
  • Lender fees: Some lenders charge origination fees ranging from 1-10% of the loan amount. Even if the APR is on the lower end, high origination fees might make a different loan product the more practical choice.
  • Characteristics of the lender: Top lenders also have an online dashboard where you can monitor your account, schedule payments, and chat with customer service representatives. It’s also great if free educational resources are available to help you manage your credit and overall financial health more effectively.

At the end of the line

Before applying for a loan or credit card to consolidate your debt, weigh your options to decide which type of debt consolidation makes the most sense. Plus, get prequalified with at least three lenders to see potential loan quotes and compare your options. This will allow you to make an informed decision, reach your debt repayment goals faster, and save money.