Debt consolidation loans
A debt consolidation loan combines 2 or more debts into a single, new loan. It can help you to simplify payments and manage your debt more effectively.
How do debt consolidation loans work?
While some lenders may use the term debt consolidation loan, these are simply a type of personal loan. The key difference is that debt consolidation loans are specifically used to pay off multiple debts, like credit cards or other loans.
If you apply for a debt consolidation loan and are approved, the lender either deposits the funds into your account, allowing you to pay your creditors as desired, or sends them directly to your creditors.
What does a debt consolidation loan look like in practice?
If you’re making monthly payments on 3 credit cards with outstanding balances, you can use the funds from a debt consolidation loan to pay off all 3 balances. Those 3 monthly payments are then replaced with just 1 payment on your debt consolidation loan, based on those loan terms.
When should you consider a debt consolidation loan?
If you’re looking to combine existing debts, a debt consolidation loan can make sense, provided:
- You can get a lower interest rate: Finding a debt consolidation loan with a lower interest rate than that of your current debts can help save you money over the loan term. Keep in mind though, that some debt consolidation loans could have longer terms than your outstanding debt. This could mean you’ll pay more interest in the long run, even if the monthly payment is more manageable.
- You have variable-rate debt: Debt consolidation loans typically have fixed interest rates, which may be more favorable when interest rates are rising. Provided you don’t default on payments (which may happen once a missed payment hits the 30-day mark), your monthly payment will remain consistent for the loan term, allowing you to save money on interest when compared to higher credit card annual percentage rates (APRs), which can rise over time.
Alternatives to debt consolidation loans
Loans aren’t the only way to manage debt. You may also consider balance transfer credit cards and other debt repayment strategies.
Balance transfer credit cards
A balance transfer credit card lets you move outstanding credit card debt to a new one, typically for a fee. While cardholders may pay a fee to transfer balances, they can usually get a low introductory APR for a specified period. The low introductory APR typically lasts 9 to 21 months, and cardholders can use this opportunity to pay down debt. Once that period ends, however, any unpaid balance is subject to the regular APR.
Debt snowball method
The debt snowball method focuses on reducing debt by tackling smaller and more manageable debts first. To start, list all your debts from smallest to largest. Then continue to make the minimum payments on the larger debts while using any extra money to pay off the smallest debt faster. Each time a debt is repaid, you follow the same strategy with the next-smallest debt, rolling the money you were using to pay the smallest debt into payments.
Debt avalanche method
The debt avalanche method prioritizes paying off high-interest debt. Start by listing all your debts from highest to lowest interest rate. Then make minimum payments on all of your debts, putting any extra money toward the highest-interest debt to pay it off faster. Once that’s paid off, you can focus on your next highest interest rate debt, rolling your payments from the first debt in to pay down the balance faster. Finally, repeat the process until you’ve paid off all of your debts.
Personal loans
The term “personal loan” applies to a broader category of loans you can use for a wide range of purposes, including bigger purchases like car repairs, home renovations or moving costs. You can also use a personal loan to consolidate debt, even if it is not explicitly called a debt consolidation loan.
Keep in mind that although you can use personal loans for many purposes, lenders can restrict how you can use funds. Most lenders, including Citi, won’t allow you to use personal loan proceeds for educational or business expenses.1
How do personal loans work?
Unsecured personal loans are available through most banks, credit unions and online lenders. Interest rates, amounts and terms depend on the lender’s policies as well as the borrower’s creditworthiness, income, debt-to-income ratio and other factors.
Most lenders have an online application process. Typically, you need to provide basic personal details as well as proof of your income and identity. When you submit an application, the lender performs a hard credit inquiry — which can have a small, temporary impact on your credit score — to decide if you qualify and if so, what your loan terms will be.
Approved applicants often receive the funds by check or direct deposit. After you get the money, you begin making monthly payments as specified by your loan terms.
When should you consider a personal loan?
Personal loans are typically best for situations where you need funds quickly to finance a expense. You may consider a personal loan when:
- You’re looking for a flexible loan: You can use the funds from a personal loan for a variety of different types of expenses1. For example, part of your loan can go toward a wedding and the rest can go toward paying off a credit card balance.
- You need funds for a sudden or emergency expense: Not only can you use personal loan funds for many purposes, including emergencies, but the turnaround time can be short following approval. For example, approved Citi account holders can get funds deposited into their account as soon as the same business day. Non-Citi accountholders can get funds deposited within just two days of approval.2
Alternatives to personal loans
Although you can use a personal loan for just about anything, they might not be the best option for every situation. You may also consider credit cards and personal lines of credit (PLOCs).
Low intro APR credit cards
Credit cards can be a convenient way to make everyday purchases. However, you may also consider using credit cards for larger expenses like car repairs if you can get a credit card with a low introductory APR for purchases. If you can pay off the balance before the promotional period ends, you may minimize your interest charges.
Personal lines of credit
A personal line of credit is a revolving line of credit that typically lets you withdraw funds up to a limit during the draw period. That can last 3 to 5 years, and you often need to make minimum monthly payments if you borrow funds. After the draw period ends, you typically enter repayment.
PLOCs can make sense if you need ongoing access to funds or are unsure how much something — for example, a kitchen renovation — will cost.
Debt consolidation loan vs. personal loan: How to choose
The best type of loan depends on your financial needs and circumstances. If your goal is to combine multiple debts, getting a debt consolidation loan might make sense. However, if you need funds for other reasons, such as to pay for a wedding or home repairs, then a personal loan may be the better option.
Some of the factors you may want to consider include:
- APRs
- Terms
- Fees
- Monthly payment
- Maximum loan amounts
If possible, use pre-qualification to help compare your loan options without harming your credit score. That will help you understand if you’re likely to qualify for certain loans and, if so, what your terms might look like.
Citi offers flexible, fee-free personal loans to qualified applicants. If you think you could benefit from a Citi® Personal Loan, apply online today.
This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
1Citi® Personal Loan proceeds cannot be used to pay for post-secondary education expenses or for business purposes. Credit cards issued by Citibank, N.A. or its affiliates, as well as Checking Plus and Ready Credit accounts, are not eligible for debt consolidation, and Citibank will not issue payoff checks for these accounts. If you are unsure of the issuer on the account, please visit https://www.citi.com/affiliatesproducts for a list of Citi products and affiliates. 2If you are approved for a personal loan with Citi, you can get your funds the same day with a Citi deposit account, or up to 2 business days for a non-Citi account when using direct deposit. Or, you can select to receive a check by mail in approximately 5 business days.
2If you are approved for a personal loan with Citi, you can get your funds the same day with a Citi deposit account, or up to 2 business days for a non-Citi account when using direct deposit. Or, you can select to receive a check by mail in approximately 5 business days.
