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How to Get a Debt Consolidation Loan During a Recession

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If you're feeling a financial pinch due to the pandemic, you might be looking for ways to make your debt payments more manageable. One potential solution is a debt consolidation loan, which allows you to combine your debts so you only have one monthly payment to worry about.

But as lenders continue to manage risk in the midst of a global recession, are debt consolidation loans even being offered? Here's what you need to know.

How Debt Consolidation Loans Work

As the name implies, debt consolidation loans offer a way to consolidate your debts. They work like this: You apply for a new loan, use the money from that loan to pay off your debts, and then pay back the debt consolidation loan in monthly installments.

Some debt consolidation loans are specifically created and marketed for that purpose, with lenders sending the money directly to your creditors. It's also common to simply use a personal loan to pay off debts and consolidate debt that way (if you go this route, pay your bills ASAP so you aren't tempted to spend the money elsewhere).

Consolidating debt can have advantages in certain situations, and help you do the following:

  • Streamline your bills: Consolidating debt eliminates the need to juggle multiple due dates, payments and interest rates. Not only could that reduce stress, but it could also improve your ability to budget for the future, since you'll know exactly what your monthly payment will be—and for how long you'll be paying it.
  • Free up some room in your budget: In many cases, your total monthly payment will decrease due to a lower interest rate, extended repayment term or both. Personal loans tend to have a lower interest rate, on average, so consolidating high credit card balances can save you a considerable amount in interest charges.
  • Potentially increase credit scores: Personal loans don't count toward your credit utilization ratio, which is a major factor in your credit scores. Using a personal loan to pay off a maxed-out credit card could help you improve your credit scores if it drastically reduces your credit utilization. Debt consolidation might also make it easier to pay your bills on time and avoid late payments from appearing on your report.

There are, however, some things to keep in mind when consolidating debt:

  • It could result in higher costs over time. Debt consolidation loans can lower your monthly payments, but some may do so by extending the length of your repayment term. That means you'll ultimately pay more in interest over the life of your loan. Many personal loans also come with origination fees or prepayment penalties.
  • Lower credit scores may limit your options. It's possible to get a debt consolidation loan with bad credit, but you might end up with an interest rate that's higher than your current debts. To avoid a surprise, try using Experian CreditMatch™ to get prequalifed for a debt consolidation loan.
  • Consolidation won't make your debt disappear. Getting a debt consolidation loan won't address your debt other than shifting it to a new loan. You'll still be responsible for paying it off. Another thing: If you consolidate debt but don't change your behavior, you could end up putting more money on those now-empty credit cards—and be in a worse position than before.

Can You Get Consolidation Loans in an Economic Downturn?

Now for the million-dollar question: Can you get debt consolidation loans in an economic downturn, such as the one caused by the coronavirus pandemic? The short answer is yes; the longer answer is it depends on the lender and borrower.

"Debt consolidation loans are still available even in this pandemic," says Mark Lorimer, chief administrative officer of LendingPoint. "By July, LendingPoint was back to originating at the same levels as 2019. We expect September through year-end to be record funding levels every month."

Renaud Laplanche, CEO of Upgrade, had similar news to share. "There is never a bad time to pay off high-interest credit cards with a lower-interest loan," Laplanche says. "In fact, we extended more credit in August than we did in February before the start of the COVID crisis."

Though many lenders are still giving out loans, some may have altered their procedures or become more stringent in their approval processes. Lorimer, for instance, noted that more lenders now verify employment and income before issuing loans.

Ibo Dusi, chief operations officer of Happy Money, which issues debt consolidation loans through Payoff, agreed. "With high unemployment, having verifiable income is key to securing a loan," he says. "Make sure you will be able to provide full documentation in the approval process."

Dusi also pointed out that, according to research from Happy Money, "people who [reduce] debt early in a recession versus taking on additional debt end up with less stress and are better equipped financially when conditions start to improve."

What to Do Before Applying for a Debt Consolidation Loan

Thinking about applying for a debt consolidation loan? Your first step should be pulling your credit reports and checking your credit scores.

If they're in good shape, you can skip to the next section below.

But if they're "fair" or "poor," you might want to improve your scores before moving forward. Doing so would likely open you up to more options and lower interest rates. If you're having a hard time getting qualified for a loan through traditional lenders, you may want to look into lenders such as Upstart or LendingPoint that factor in "alternative data" including job history, income and education when determining eligibility and interest rates.

Where to Find Debt Consolidation Loans

If you're ready to look for a debt consolidation loan, one place to begin your search is by signing in or creating an account with Experian CreditMatch™, which can present you with debt consolidation loans suited to your credit profile.

When you're evaluating the loans, consider the repayment terms, fees and minimum credit scores. If a lender offers prequalifications using a soft credit check, you can also compare interest rates without it affecting your credit scores.

To help you get started, here are five debt consolidation loans for every credit score:

SoFi

Apply

on SoFi's website

Recommended FICO® Score*
Good - Exceptional

Est. APR

5.99 - 18.25%

Term

24

Amount

Available loan amounts: $5,000 to $100,000

Est. monthly payment: $219 to $4,992

Grace period: 10 days

Application fee: $0

Loan Details
  • Personal Loans at fixed rates from 5.99% APR (with autopay)
  • Borrow up to $100,000
  • No Origination Fees, No Prepayment Penalties, and No Late or Overdraft Fees
  • Simple online application with live support 7 days a week
  • Apply Now
Disclosure

If you have strong credit scores, look no further than SoFi, which offers loans of up to $100,000 with fixed interest rates from 5.99% to 18.28%. Best of all, it doesn't charge any origination, prepayment or late fees (though, for the sake of your credit scores, you should still pay on time).

Payoff

Apply

on Payoff's website

Recommended FICO® Score*
Good - Exceptional

Est. APR

8 - 25%

Term

24

Amount

Available loan amounts: $5,000 to $35,000

Est. monthly payment: $219 to $1,816

Grace period: 10 days

Application fee: $0

Loan Details
  • 8% - 25% APR
  • Pay off high-interest credit card balances and save
  • Quickly check your rate without affecting your credit score
  • No prepayment, late, or check-processing fees
  • Members see an average FICO® Score boost of 40 points when paying down credit card balances1
Disclosure

If you have high-interest credit card debt and decent credit, then Payoff's loans were designed for you. You can borrow what you have in credit card debt (up to $35,000), and send the loan amount directly to your creditors. While the lender does charge an origination fee of up to 5%, it doesn't have prepayment or late fees.

Avant

Apply

on Avant's website

Recommended FICO® Score*
Fair - Very Good

Est. APR

9.95 - 35.99%

Term

24

Amount

Available loan amounts: $2,000 to $35,000

Est. monthly payment: $91 to $2,048

Grace period: 10 days

Application fee: $0

Loan Details
  • Personal loans from $2,000 to $35,0001 entirely online
  • Checking your loan options will not affect your credit score
  • Funding as soon as next business day2
  • No collateral needed and customer support available 7 days a week
Disclosure

If you have fair credit scores or better, Avant is a solid choice. It features debt consolidation loans of up to $35,000, repayment terms of up to 60 months and administration fees (similar to origination fees) that max out at 4.75%. Most important, it's known for offering reasonable interest rates to applicants with fair credit.

Upgrade

Apply

on Upgrade's website

Recommended FICO® Score*
Fair - Exceptional

Est. APR

7.99 - 35.97%

Term

36

Amount

Available loan amounts: $1,000 to $35,000

Est. monthly payment: $30 to $1,467

Grace period: 15 days

Application fee: $0

Loan Details
  • Affordable loans from $1,000 - $35,000 with low fixed rates that will never change, affordable monthly payments, and no prepayment penalties
  • Quick online application -- get pre-approved in just minutes
  • Checking your rate won't impact your credit score
  • Review multiple loan options so you can pick the amount and term that fits your budget and timeline
  • With automatic payments and a customizable due date, managing your account is easy and you'll be able to circle the date on your calendar when you'll be debt free
Disclosure

Another option for those with less-than-perfect credit, Upgrade has debt consolidation loans of up to $35,000 with origination fees between 2.9% and 8%. Laplanche, the company's CEO, also noted that Upgrade has "a number of features that help improve someone's chances of getting approved or qualifying for a lower rate," such as adding a co-borrower.

LendingPoint

Apply

on LendingPoint's website

Recommended FICO® Score*
Fair - Good

Est. APR

15.49 - 35.99%

Term

24

Amount

Available loan amounts: $2,000 to $25,000

Est. monthly payment: $97 to $1,463

Grace period: 0 days

Application fee: $0

Loan Details
  • Personal loans from $2,000 to $25,000
  • Rates from 15.49% to 35.99% APR with no prepayment penalties
  • Check your rate for free without impacting your credit score
  • Qualified customers receive offers in three simple steps, and funds in as little as 24 hours if approved
  • Simple and Secure - quick online application
  • LendingPoint's customer success representatives are available online or by phone 24/7, just call 888-969-0959
  • Terms from 24 - 48 months
Disclosure

If your credit scores are limiting your options, LendingPoint could be a good lender to work with when consolidating your debt. Besides your credit scores and history, it also considers your job history, income and bank records when deciding whether to extend you a loan. Though its interest rates are high, it offers the opportunity for fixed monthly payments without prepayment penalties.