Your Guide To Debt Consolidation Loans

Disclaimer: We are not qualified legal or tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.



Many prospective customers call Pacific Debt in hopes of obtaining a debt consolidation loan to pay off their existing credit lines. During our initial consultation with clients, we review the fact that Pacific Debt is not a lender and therefore does not offer consolidation loans. Instead, we offer a program called debt settlement, which is a form of debt relief that does not require taking out a new loan. For more information, feel free to read and learn more about our debt settlement program.

Criteria For Obtaining a Personal Loan

For those of you who are looking for a loan, there are several factors that will determine what your options may be, here are a few of those factors:

1. What is your credit score? Generally speaking, the higher your score, the better the rate you will be offered and the more loan options you will have. Typically the lowest rates are reserved for consumers with a FICO score of 720 and above. If you don’t know your score, financial websites such as CreditKarma.com now allow you to track and monitor your score for free.
2. What is your capacity for repayment? In order to obtain a loan, you are going to be asked about your employment history and level of income. Lenders prefer to see stable income and will analyze your debt-to-income ratio when considering the risk involved with extending you a loan.
3. Are you willing to use collateral to secure the loan? If you use your home or vehicle as collateral to secure the loan, lenders may offer you a lower interest rate or overlook less than perfect credit. Of course using your home or vehicle as collateral also puts those assets at risk in the event that you default, so you need to be extremely confident in your ability to repay the loan.

Types of Loans Available

Now that you have reviewed some of the major factors that lenders will consider on your quest for a consolidation loan.

Here are the types of loans that might be available to you:

Pay Day Loans

Designed as a short-term stopgap, payday loans are typically obtained with the understanding that the loan will be repaid on your next payday. These loans are typical $500-$1000 and come with huge interest – often 300% APR or higher. Be careful with these high-interest loans, as they can get you in serious trouble. In fact, regulators such as the CFPB, have serious concerns about payday loans and are taking action to curb abuses in the payday loan industry.

Personal Loans

A better alternative to payday loans are personal loans. Personal Loans can be either secured or unsecured and typically come with a fixed monthly payment and repayment term.

• Unsecured: Over the past few years unsecured personal loans have become very popular. Traditionally, these loans have been offered by major credit card issuers and carry interest rates of 10-25% typically. Recently, peer-to-peer lenders such as Prosper and Lending Club have sprouted up in the marketplace, giving consumers more options than ever before with regards to consolidating their debts. The downside to most of these loans is that the interest may be just as high as what you are paying on your credit card debt. In fact, a quick review of Lending Club’s website shows that a consumer with poor credit, looking to borrow and repay a loan over 60 months, could face an APR of 35%!
• Secured: If you use your home or a car to secure a loan, you may be able to snag a lower interest rate on your personal loan. However, the catch is that if you default on your payments, the lender is now entitled to your property and that can put you in a very serious financial predicament. If you are considering a title loan to your vehicle, check the interest rate, as they are often just as bad as payday loans.

Changing Financial Behavior

Once you have obtained a loan and paid off your other debts, it is important to change the behavior that led to accumulating the debt in the first place. At Pacific Debt, we frequently speak to consumers who previously obtained a consolidation loan to pay off their credit cards, but now have a large personal loan and also carry large balances on their credit cards. The bottom line is that unless your financial behavior changes, a personal debt consolidation loan is really just a method of transferring your debt from one creditor to another.

We encourage consumers to do their due diligence and research your options. If you are not comfortable with the loan being offered (remember many personal loans have interest rates over 20%), feel free to give us a call at Pacific Debt. One of our professional and courteous counselors can review with you all of your options and can explain how debt settlement may be an appropriate alternative. The call and consultation are free, and unlike getting a new loan, we actually work to get you out of debt for less than you owe right now – not more.

Pros and Cons of Debt Consolidation Loans

While debt consolidation loans offer potential benefits, they also come with risks to weigh.

Potential Benefits

• Lower monthly payment. Consolidating debt into one loan means only having a single payment to manage versus multiple payments. This new consolidated payment is often lower than the total of previous payments.
• Single payment. Instead of tracking multiple payment due dates, you only have one monthly consolidated loan payment. This simplifies payment management.
• Potentially lower interest rate. If your credit cards have high-interest rates, a debt consolidation loan could offer significant savings at a lower rate.
• Clear payoff timeline. Debt consolidation loans have set repayment terms, typically 3-7 years. This provides a light at the end of the tunnel since credit card debt has no defined payoff date.

Risks to Consider

• Extending loan terms. While you lower your monthly payment, a longer loan term likely means paying more interest over time compared to high-rate debts like credit cards paid off more aggressively.
• Impact on credit score. The hard inquiry from applying for a consolidation loan can cause a small, temporary drop in your credit score. Closing credit card accounts can also lower your score.
• Paying more interest over time. Be sure to calculate the total interest paid over the life of the loan. It’s possible you could pay less interest by sticking with current debts and paying them off aggressively.
• The temptation to rack up more debt. Access to open credit cards while consolidating debt can tempt some to dig themselves back into debt and negate the benefits.

Changing Financial Behavior

Once you have obtained a loan and paid off your other debts, it is important to change the behavior that led to accumulating the debt in the first place. At Pacific Debt, we frequently speak to consumers who previously obtained a consolidation loan to pay off their credit cards, but now have a large personal loan and also carry large balances on their credit cards.

The bottom line is that unless your financial behavior changes, a personal debt consolidation loan is really just a method of transferring your debt from one creditor to another.

We encourage consumers to do their due diligence and research your options. If you are not comfortable with the loan being offered (remember many personal loans have interest rates over 20%), feel free to give us a call at Pacific Debt.

One of our professional and courteous counselors can review with you all of your options and explain how debt settlement may be an appropriate alternative. The call and consultation are free, and unlike getting a new loan, we actually work to get you out of debt for less than you owe right now -- not more.

Other Debt Relief Options

Beyond taking out a new loan, other types of debt relief may be better suited depending on your situation.

Debt Management Plans

Debt management plans allow you to consolidate multiple debts into a single payment. The credit counseling agency then distributes payments to your creditors. Typically creditors agree to reduced interest rates, waived fees, and a defined payoff timeline.

Debt Settlement

Debt settlement involves negotiating with creditors to settle debts for less than owed. The agreed-upon reduced settlement amounts are then paid over time. This allows debt to be paid off faster and for less than originally owed.

Balance Transfer Credit Cards

Balance transfer cards allow you to consolidate debt onto a new card offering an intro 0% APR period so payments go entirely to reducing principal during that time. This can help pay down balances faster.

DIY Repayment Strategies

Methods like the debt avalanche and debt snowball can be used to strategically tackle debts yourself without consolidation. The snowball method prioritizes paying small debts first while the avalanche method targets high-interest debt first.

Debt Consolidation Loan Shopping Tips

When exploring debt consolidation loans, keep these tips in mind:

• Check rates from multiple lenders. Rates can vary significantly, so compare options from banks, credit unions, online lenders, and peer-to-peer marketplaces.
• Watch out for origination and other fees. Ask lenders to clearly disclose all fees associated with the loan. High fees can negate interest savings.
• Avoid prepayment penalties. Some lenders penalize you for paying off a loan early. Make sure your loan terms allow you to pay extra or pay off early with no penalty.
• Be cautious with low rates tied to collateral. Sometimes very low interest rates require you to put up an asset like your home or car as collateral. This risk may not be worth the rate reduction.
• Only borrow what you need. It can be tempting to withdraw extra cash above what you need to consolidate debts. Avoid borrowing more than required.

Calculate Your Interest Savings

Before committing to a consolidation loan, run the numbers to determine potential interest savings:

• Add up total interest paid over current debts' lifetime
• Estimate total interest to be paid on consolidation loan
• Compare the two totals to see if the loan results in meaningful savings

An online debt consolidation calculator can help with interest calculations. Make sure the savings justify the effort of consolidating your debts into a new loan.

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