It is extremely difficult to manage multiple high interest debts especially the ones from credit cards and payday loans. If not controlled timely, they can spiral out of control. Fortunately there are methods like debt consolidation that can offer you relief during such difficult times. However, the method you choose to consolidate your debt matters the most and it can literally make or break your deal. One of the most popular debt consolidation loan options that people often choose is banks. But are banks always the right pick and which banks offer debt consolidation loans with the best terms?
In this guide, we’ll explain it all, when banks are the right option to secure a debt consolidation loan and when they’re not.
What Is Debt Consolidation?
Debt consolidation is all about combining multiple high interest debts into one single debt with a comparatively lower interest rate. Dealing with multiple debts can become really overwhelming. Tracking the monthly repayments, calculating multiple interests and deciding which one to pay off first. It can all be really stressful at times. This is where debt consolidation comes in handy. It’s the best solution if you want to simplify your finances and save on interest too.
Why Are Banks A Popular Option For Debt Consolidation Loans?
People often turn to banks to secure debt consolidation loans because not only do they offer personal loans, in fact, they deal in home equity loans and balance transfer offers as well. You can use any of these tools for debt consolidation. Here are some more appealing reasons why banks are always the go-to option for borrowers;
- Lower interest rates as compared to payday loans and credit cards
- Properly structured repayment terms
- The monthly payments are more predictable
“Are banks always the best option for debt consolidation?” Well, the answer solely depends on your financial profile and the type of debt you are dealing with. Let’s explain it to you in a better and more detailed way;
Scenario 1 – Credit Card Debt
If you have a significant amount of credit card debt, banks are always a great option for consolidation. Especially if;
- You have an excellent credit score above 660
- You qualify for a low interest loan
- You qualify for a 0% APR balance transfer card
- Your debt is spread across multiple cards
Example: You owe around $10000 across three different credit cards and are paying a 20% interest altogether. Your bank offers you a 4 year personal loan at 8% APR. Not only will you be able to save a substantial amount on the interest rate in fact, you’ll also have to make one single payment every month instead of three.
When Banks Aren’t The Right Fit For You
- If you have a poor credit score, your bank will most likely reject your loan application and even if you do qualify for a loan, you’ll have to pay higher interest.
- When your debt to income ratio is far too high for the bank to approve your loan application.
Best Alternatives:
- DMT plans through non profit credit counseling agencies
- Secured loans (you have a valuable asset that can serve as your collateral)
- Online lenders who might offer more flexible loan terms
Scenario 2- Secured Vs Unsecured Bank Loans
If you have a poor credit score and your chances of getting an unsecured loan are quite thin then it’s best to leverage your valuable assets, use them as collateral and apply for a secured loan. Secured loans come with lower interest rates but they are quite risky as well.
When It’s Good Fit:
- You want a larger loan amount that exceeds $10,000
- You are confident that you’ll be able to repay the loan
- You own a valuable asset, especially a home with equity
When It’s Not A Good Fit:
- You aren’t confident about the repayments because if you default, you risk foreclosure
- You are just looking for a loan to resolve your spending issue instead of resolving your debt
- You are using long term assets for your short term loans.
Scenario 3- Payday Loan Debt
In case of payday loan debt, banks aren’t a good option especially because they rarely consolidate such types of loans. Especially if you are badly stuck in a payday loan cycle, your bank will most probably reject your loan application. Here’s why;
- Payday loans signal a high risk borrowing profile
- If you have an unstable income and a poor credit score, no bank would be willing to approve your loan
- The loan amounts in case of payday loan consolidations are quite small but the risk is quite high.
Example: You’ve taken out several payday loans totalling $15000 and you are rolling them over every month. Your bank will immediately decline your personal loan application because they see you as a high risk borrower.
What Are The Alternatives?
When banks can’t help with payday debt consolidation loans, here’s what you can do;
- Try credit unions because they do offer payday alternative loans and they have more flexible lending criterias
- You can take help from a non-profit credit counseling agency and build a plan that can help you pay off your payday loans
- In case you are already in default then opt for debt settlement
Key Factors Banks Consider For Debt Consolidation
There’s no doubt in the fact that banks have a very strict lending criteria and they consider multiple factors including;
- Your credit score: It should be above 660 and you should also have a well-maintained payment history
- Debt to income ratio: Your DTI matters the most to banks when applying for a consolidation loan. The higher the DTI, the more likely the bank is to decline your loan application.
- Employment history: You need to have a solid employment history. If you have gaps in your employment or if you’ve been frequently changing your job then it’s a red flag for the bank.
- Your current relationship with the bank: You need to have a good and a long standing relationship with the bank to secure a debt consolidation loan with better terms and interest rates.
Final Thoughts
Traditional banks are the best option for debt consolidation loans especially if you have a solid income and an excellent credit score. However, when it comes to payday loans or poor credit scores, it’s best to avoid turning to banks because your applications won’t go through and even if they do, you’ll be offered high interest loans which will increase the overall cost of your debt in the long run.
If you want to escape the debt trap, it’s important that you first understand your financial situation and then choose the right option accordingly. You need to ensure that whether you are opting for a credit union or a bank for consolidation, your approach should be realistic and sustainable. Most importantly, regaining financial freedom is no magic and it certainly won’t happen overnight. Even if you secure a consolidation loan with a low interest rate, you still need to work on your financial profile and manage your debts responsibly especially if you don’t want to fall back into the same cycle again.
FAQs
Q1. Is It Possible To Consolidate All Types Of Debts With A Bank Loan?
Not always. Banks approve consolidation loans only for unsecured personal loans or credit card debts. If it’s a payday loan that you want to consolidate or a very small amount of debt with high risk then banks will most likely reject your loan application.
Q2. Will Debt Consolidation Hurt My Credit?
Yes, debt consolidation will hurt your credit but it’ll be temporary especially if you start working on improving your financial profile immediately after the consolidation. All you have to do is to make timely payments, keep your credit utilization as low as possible and avoid any new debts. Once you maintain and manage this routine, your credit score will improve.
Q3. Is It Better To Get A Secured Loan Or An Unsecured Loan From A Bank?
For unsecured loans, you don’t need any collateral but you’ll have to deal with high interest rates. On the other hand, as secured debts require collateral, they are considered less risky and hence the interest is lower as well. The right option depends on your financial stability and risk tolerance.
Looking for a more personalized debt consolidation plan that can easily lead you towards complete financial freedom? Try Mountains Debt Relief now. With us, you’ll easily make it out of your debt-trap.