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Is a Debt Consolidation Loan Right for You?

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Debt Consolidation Loan
Roger Wohlner
Roger Wohlner
Jan. 26, 20213 min read
A debt consolidation loan allows a borrower to consolidate various debts into one loan. Borrowers use the loan proceeds to pay off credit card debt, higher interest loans and other debts. Ideally, using a debt consolidation loan will allow borrowers to reduce their overall interest payments and make it easier to manage their debt with it consolidated in one place.

4 Reasons to Get a Debt Consolidation Loan 

Debt consolidation loans can be a solution for your debt issues under some circumstances. They are not right for everyone or for every situation. 

1. You’re Tired of Being in Debt 

Being proactive and trying to resolve your debt situation is admirable. A debt consolidation loan might be a good tool to help you accomplish this goal. Perhaps your debt is the result of high student loan debt. Or perhaps you have more credit card debt than you’d like. Debt can also arise due to a serious medical condition or from expenses incurred when you were low on cash due to a job loss. 

Debt resulting from these or other issues might be a good candidate for a debt consolidation loan. However it's important to be honest with yourself regarding whether or not the debt you are looking to consolidate was the result of out-of-control spending. If it was, your first priority should be to reign in your spending as a debt consolidation loan will not solve your debt problem in this case. 

2. You Want to Improve Your Credit Score

A debt consolidation loan can help you improve your credit score over time by paying down your debt faster. Reducing the amount of your debt will have a favorable impact on your credit score. According to FICO, 30% of your credit score is determined by the amount of outstanding debt you have. 

A debt consolidation loan can help improve your credit score by ultimately helping you utilize a lower portion of the overall available credit. It can also help demonstrate a solid payment history, another factor in your overall credit score. 

3. You Want to Lower Interest Payments 

If you qualify for a debt consolidation loan with a lower interest rate than the rates on the debt that you are consolidating via this loan, this will serve to reduce your overall monthly interest payments. This can be a help to those struggling to keep their spending in check.

 In most cases, the interest rate on a debt consolidation loan will be much lower than the interest rate on credit cards you are looking to pay off. 

4. You Want Help with Money Management 

While a debt consolidation loan might not be the first thing that pops into most people’s heads when they think of money management, in the right situation it can be a tool to do just that.

 If you are paying off a large number of distinct accounts each month, including several credit cards, it can be easy to lose track of who and what needs to be paid. Consolidating your debts into one loan can help you regain control of your debt and your overall finances. 

3 Reasons to Not Get a Debt Consolidation Loan

While a debt consolidation loan can be a powerful tool for some, it’s not the right option for everyone. Here are some situations where a debt consolidation loan may not be the right option for you. 

1. You Can’t Afford the Debt Consolidation Loan Payments 

Depending upon the level and nature of your debt, you might find that the payments on the debt consolidation loan are higher than you can afford. While credit card debt or other forms of debt might have lower minimum payments, a debt consolidation loan will come with a required payment that you need to make each month.

 While there can be many benefits from using a debt consolidation loan, defaulting on your loan might put you in a worse position than you were in prior to obtaining it. 

2. Your Debt Amount is Small  

If the total amount of your debt is relatively small, it might not pay to look at a debt consolidation loan. There are often fees involved and other costs that might make this an expensive solution for a small amount of debt. 

3. You Plan on Continuing to Spend 

If your plan is to pay off credit card debt using a debt consolidation loan it's important that you keep your spending under control. If you have a high level of credit card debt, excessive spending may have been the reason that your debt level got so high in the first place. 

A debt consolidation loan is not a good solution if you plan to keep spending and accumulating high levels of credit card debt. You may find yourself in a worse position than you were in previously. You will have a payment on the debt consolidation loan that must be paid, plus the new high interest credit debt from your new spending spree. 

Next steps: Compare Debt Consolidation Loan Lenders 

If after reviewing your situation you feel that a debt consolidation loan may be right for your situation, the next step is to compare lenders. Here are three to consider. 

Freedom DR 

Freedom DR offers debt consolidation loans focusing on borrowers with unsecured debt, credit card debt, medical debt and debt from personal loans. They offer a free initial consultation, phone support that is available 7 days a week and an online client portal. 

  • Their fees range from 15% to 25% of the debt level that you enroll in their program.
  • Freedom DR negotiates with your lenders.
  • The typical client is in the program for anywhere from 24-84 months.
  • Their goal is to help clients get rid of their debt for an amount that is less than they currently owe.
  •  Freedom DR is not currently available in all 50 states. 

ClearOne Advantage 

ClearOne Advantage is a debt consolidation loan service company with a solid long-term track record. They have been in existence since 2007 and they have helped over 140,000 clients. 

  • They offer a free consultation and phone support is available 7 days a week. A few features of their program: 
  • Their fee is based on the amount of interest that you save through their program.
  • They have an A+ rating with the Better Business Bureau.
  • They only deal with unsecured debt.
  • The minimum amount of debt to participate in their program is $10,000. 

Accredited DR 

Accredited DR works with both secured and unsecured debt. They offer a free initial consultation to help determine how much you could potentially save with a debt consolidation loan. Accredited DR touts its personalized service.If you go with the program and find yourself behind on payments, their support team will try to make accommodations for your situation. 

  • You must have a minimum of $10,000 in debt to qualify.
  • They negotiate with your creditors to reduce the amount you owe and then issue a debt consolidation loan usually with more favorable terms.
  • They have an A+ rating with the Better Business Bureau.
  • Their service is only available in 32 states. 

What’s Your Next Move? 

A debt consolidation loan can be a solid option to lower your interest costs and potentially get out of debt faster. It’s important that you assess your situation to see if a debt consolidation loan is the right solution for you. Be sure to shop around for the right debt consolidation loan for your situation. 

Top 5 Debt Consolidation

Freedom DR

Freedom DR

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ClearOne Advantage

ClearOne Advantage

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Accredited DR

Accredited DR

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Fast Track Financial

Fast Track Financial

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CuraDebt

CuraDebt

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Roger Wohlner
Written byRoger Wohlner

Roger is a financial writer who brings his experience as a financial advisor to his writing. His work has been featured in TheStreet, Investopedia, US News & World Report, Yahoo! Finance, The Motley Fool and his blog, The Chicago Financial Planner.

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