Consumer Tips

Is a Debt Consolidation Loan Right for You?

You have options when it comes to managing your debt. You may have considered debt consolidation, but is it right for you?


Debt consolidation is a tool for helping reduce debt. But is this the right solution for you?

The Optimal Credit

In general, the optimal applicant has fair to good credit, and is looking to better manage and reduce their high interest debt. One of the most important factors in applying for a debt consolidation loan is your FICO® credit score. This implies your ability to manage your finances and is best seen above 600. Your FICO® Score is greatly impacted by your payment history (which accounts for 35% of your score) so it is best to ensure your current payments are being made on time. A new feature by Experian can help improve your score instantly - Experian Boost™ helps by giving you credit for the utility and mobile phone bills you're already paying. 

The Right Debt

Not all debt is able to be consolidated. Generally, any installment loans, credit cards, store-issued credit, medical bills, and payday loans are eligible for consolidation. Debt that is not excessive (ideally $5,000-$40,000) aligns with most debt consolidation lenders. The consolidation loan rolls these multiple debts into a single payment to help manage your debt. If your debt is too extreme, the consolidation lender may not be able to offer affordable payments, and you may want to explore alternatives, like debt settlement or credit counseling.

The Ultimate Goal

Ultimately, debt consolidation is part of a plan to become debt-free. For this reason, a debt consolidation loan works best if you are willing to stick to a budget and not build back up debt that was just paid off with the consolidation loan. This allows you to commit to the loan payment and achieve your goals. 

The Real Advantage

The most obvious advantage of a Debt Consolidation Loan is reducing debt. More specifically, though, debt consolidation loans create a single payment to pay off multiple creditors, which helps avoid missed payments and penalties. Credit card interest can range from 18-25%, and in most cases a debt consolidation loan can offer a lower interest rate, allowing the debt to be paid off quicker as a result of these interest savings. 

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This content was not written by a certified financial planner or advisor. It’s intended for informational purposes only and should not be considered legal, financial, or investment advice. Consult a professional to learn what financial products are right for you.