For people struggling to manage multiple debts, debt consolidation provides just the kind of relief they need. It’s a popular strategy that won’t just help you manage your debt better but it’ll also help you save a substantial amount of money especially if you secure better loan terms. For this purpose, one of the most commonly used financial tools is a personal loan. If you are wondering which banks offer debt consolidation loans,what it means and what role do banks play here then stick along to discover everything about personal loans, how they work, their benefits and disadvantages and why banks are always the go-to option for such loans. 

Understanding Debt Consolidation 

The goal of debt consolidation is to simplify your payments with lower interest rates. What basically happens is that you use a consolidation loan to pay off all of your other high interest loans (credit cards, medical bills and payday loans). You then will have to manage only a single monthly payment with a comparatively lower interest rate. 

The Role Of Personal Loans In Debt Consolidation 

A personal loan is an unsecured loan offered by banks, credit unions and even online lenders. Secured and unsecured loans are different. In an unsecured consolidation loan you get a lump sum amount that can be used for any purpose especially for paying off all your existing debts. 

This is how it works for high interest debt consolidation; 

• Apply for a personal loan 
• Receive the lump sum amount 
• Use those funds to pay off all your other loans 
• Manage only a single monthly payment of the new loan you took at a fixed term

Using A Personal Loan For Debt Consolidation 

For personalized debt consolidation, there’s no better option than a personal loan. Here’s why; 

1-Fixed Interest Rates

When it comes to credit cards, the interest rates are variable and you can’t predict a specific amount that you owe every month. However, with personal loans, things are a lot easier as they come with fixed interest rates which means no surprises and a predictable monthly payment. 

2-Fixed Repayment Terms 

You can secure a personal loan with fixed repayment terms typically ranging from 2 years to 7 years. This way you’ll know exactly when all of your loan will be paid off. 

3-You Get Better Loan Rates

Interest rates are a big factor to consider when applying for a new loan. In case of credit cards, you don’t qualify for low interest rates until your credit score is excellent. However, with personal loans, you can qualify for better rates which means you’ll be able to save more in the longer run. 

Where And How Banks Fit In 

When it comes to personal loans, people often turn towards banks because they are the most popular and the most convenient option for such loans. Here’s why; 

1-Trust And Transparency 

Borrowers with existing checking or savings accounts trust their banks more. In fact, if you have a good long standing relationship with your bank, the loan application and approval process will be a lot more convenient and transparent for you. 

2-Personalized And In-Person Experience 

You can discuss debt consolidation options with your loan officer in person and in detail. Banks offer a more personalized experience especially to those struggling financially. 

3-Competitive Rates For Loyal Customers 

If you are already a customer, your bank might offer you fee waivers and special discounts when you apply for  debt consolidation loans. 

4-More Secure And Regulated

Well-established banks provide complete regulatory protection to their customers and they are more secure. With banks, you don’t have to worry about any hidden fee or any additional charges when applying for a loan. The process is simpler and easier for people with excellent credit scores and a well-maintained credit history. 

What Do Banks Look For In A Borrower?

Securing a personal loan from a traditional bank is the right option but they do have strict qualifying criterias;

• Credit score: You need to have a credit score higher than 660 to qualify for better loan rates. 
• Debt-to-income ratio: Banks assess your DTI to know how much of your income goes towards debt. 
• Proof of income: Banks require proof of employment and a solid income to give you competitive loan terms and rates. 
• Purpose of loan: Most banks offer personal loans especially for debt consolidation purposes but sometimes, you have to mention and explain your purpose of loan in detail to convince the bank. 

Alternatives To Banks For Personal Loans

If for some reason you don’t want to take out a personal loan from your bank or if the bank has denied you a loan for poor credit score or higher DTI then don’t worry as there are many other players in the market. You can try securing a personal loan through online lenders or credit unions. They don’t offer the same convenience or trust as banks do but yes, with a poor credit you can get your personal loan approved faster but with a higher interest. 

Things To Consider When Consolidating With A Personal Loan 

Before you use a personal loan to consolidate your debt, here are some important factors to consider; 

• Credit Score Impact: Your credit score will experience a little temporary dip when you apply for a new loan. 
• Loan Terms: Opting for a longer loan term might reduce your monthly obligations but eventually, the loan will become more expensive due to interest. 
• Fees: Some lenders charge origination fees and prepayment penalties so you have to be careful with the terms and conditions. It’s important to read the fine print carefully and ensure that the terms align with your requirements. 
• Financial Discipline: Debt consolidation won’t help eliminate your debt entirely, in fact, it’s just a restructuring tool and if you don’t practice financial discipline, it won’t take much time for you to fall back into your old habits. 

Is A Bank Based Personal Loan Really The Right Option For Debt Consolidation?

Yes, taking out a personal loan from a traditional bank for debt consolidation is the right move but again there are a few conditions to it; 

• You must have an excellent credit score 
• You want security and transparency when working with a financial institution
• You want clear payoff terms and a fixed payment every month 
• You want a more personalized experience and have a good standing with the bank already. 

It’s recommended to explore other options as well including credit unions and online lenders to get the best rates and the best loan terms as per your financial picture. 

Key Takeaway 

It’s an undeniable fact that personal loans do play a pivotal role when it comes to debt consolidation. Especially the fact that with a personal loan, you get fixed interests and fixed payment terms, managing debt can become a lot easier. Banks overall are considered more secure and trustworthy especially for those with a strong credit history. 

Before you consolidate your debt using a personal loan, it’s important to compare different options and evaluate the long term benefits. If used responsibly, a personal loan from a bank can really work wonders for you and can help you manage your finances without any hassle. 

FAQs

Q1. Why Is A Personal Loan Better Than A Balance Transfer Card?

A personal loan is a lot better than a balance transfer card because it comes with fixed repayment terms and a fixed interest rate. On the other hand, balance transfer cards have an introductory offer of 0% interest but that’s only for a limited amount of time. After the offer expires, the interest could accrue. 

Q2. Will Personal Loans For Debt Consolidation Hurt My Credit Score?

Yes, initially taking out a new loan involves a hard credit inquiry which will bring down your credit score but it’ll be temporary. When you start making your payments on time and pay off all your revolving debt, your credit score will start improving. 

Q3. What Credit Score Is Required To Take A Personal Loan From A Bank?

You only qualify for a personal loan from a bank if your credit score is up to the mark. Typically you need a credit score higher than 660 to secure better loan terms. Some people do qualify for a loan if their credit score is below 660 but typically at higher interest rates. 

Personal loans for debt consolidation are quite common but if it’s not working out for you then try our personalized debt consolidation plans. At Mountains Debt Relief, we provide comprehensive loans that’ll lead you to complete financial freedom.