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How do I choose the best debt consolidation lender?

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If you’re searching for ways to consolidate your debt, there’s no shortage of lenders who can assist you. However, not all are worth considering if you are serious about meeting your debt payoff goals.

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

Identify which type of debt consolidation works best for you

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

  • Personal loan: Many lenders offer debt consolidation loans or personal loans designed to help you pay off debt faster and save a bundle in interest. Debt consolidation loans generally come with a fixed interest rate and a one- to 10-year loan term. You’re free to use the funds however you see fit, but the idea is to pay off your outstanding debt balances with the loan proceeds.
  • Zero APR credit card: Also known as balance transfer credit cards, these debt products can also help you save a sizable amount in interest and eliminate high-interest debt balances sooner. They’re generally reserved for consumers with good or excellent credit scores. You should only consider this option if you can pay off the balances you transfer to the card during the introductory period. Otherwise, you could be stuck paying a fortune in interest.
  • Home equity loan: You can convert up to 85 percent of your property’s equity into cash and use it to consolidate debt with a home equity loan. It acts as a second mortgage and comes with a repayment period between five and 30 years. The interest rate is also fixed and lower than you’ll find with most credit cards, but the major drawback is that these loan products are secured by your home. Consequently, you could lose your property to foreclosure if you fall behind on the loan payments.
  • Home equity line of credit (HELOC): A HELOC is a type of home equity loan, but you won’t receive the loan proceeds in a lump sum. Instead, you’ll get access to a pool of cash that you can pull from as needed during the 10-year draw period. Interest-only payments are also required during the draw period on most HELOCs. Once it ends, you’ll repay in monthly installments over a term of up to 20 years. The monthly payment amount may fluctuate since the interest rate on HELOCs is typically variable.

Determine your qualifications

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

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

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

Shop around for lenders

Research lenders who offer the type of debt consolidation you’re seeking. Most offer online prequalification with a soft credit inquiry. If you’re considering a debt consolidation loan, you’ll also get a sneak peek at potential loan costs to more effectively compare your options.

Getting prequalified takes the guesswork out of finding lenders willing to work with you. Furthermore, you’ll avoid applying to lenders who could deny you a loan or credit card and getting an unnecessary hard credit inquiry.

Evaluate 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 yearly cost of borrowing for the year. It includes interest and fees, and it is determined by your credit score and debt-to-income ratio.
  • Lender fees: Some lenders charge origination fees that range from 1 percent to 10 percent of the loan amount. Even if the APR is on the lower end, a steep origination fee could make a different loan product the more practical choice.
  • Lender features: The best lenders also have an online dashboard where you can monitor your account, schedule payments and chat with customer service representatives. It’s also ideal if free educational resources are available to help you more effectively manage your credit and overall financial health.

Bottom line

Before you apply for a loan or credit card to consolidate your debt, weigh your options to decide which type of debt consolidation makes the most sense. Also, get prequalified with at least three lenders to view potential loan quotes and compare your options. Doing so will enable you to make an informed decision, meet your debt payoff goals faster and save money.

Written by
Allison Martin
Allison Martin's work began over 10 years ago as a digital content strategist, and she’s since been published in several leading financial outlets, including The Wall Street Journal, MSN Money, MoneyTalksNews, Investopedia, Experian and Credit.com.
Edited by
Loans Editor