Best Options to Consolidate Your Installment Loan Debt

Paying off one installment loan is hard enough. Juggling multiple lines of installment debt is a nightmare. That’s why people are turning to installment loan debt consolidation as a solution.

What is loan consolidation?

Loan consolidation is when you use a new loan to pay off your other debts. You still owe the money but, instead of owing money to multiple accounts, now you only owe money to one.

The main goal of debt consolidation is to use it to pay off high-interest debts like payday loans and credit cards. But you aren’t always guaranteed a lower interest rate and the offer you get will depend on your credit score, income, and other factors.

This is why debt consolidation may not be the best choice for everybody. Borrowers with poor credit scores may be rejected, end up paying even higher interest rates, or find themselves with worse terms than their existing debts.

What’s an installment loan?

Installment loans are high-interest rate loans that are offered by banks, credit unions and online lenders.

They’re usually unsecured debt, but can sometimes be secured with collateral, like a house or car. Installment loans typically offer a fixed interest rate that will be good for the life of the loan, but it can be high. It’s not a revolving line of credit. You can’t get more money without submitting another loan application, but qualifying is usually a pretty simple process, so it could be easy to end up with several installment loans at once. That’s dangerous.

There’s usually a minimum loan amount, so it can be tempting to spend any extra money you get from a second, third, or even fourth installment loan instead of using the new loan proceeds to pay off your original loan. If you have several loans at once, making the minimum payment on each can be a struggle.

Why consolidate your installment loans?

There are a lot of reasons to consider loan consolidation. Here are three of the biggest:

One payment

Consolidation takes multiple loans and lines of credit and turns them into a single debt that is owed to a single lender. This means that you only must make one loan payment each month. This can also help you avoid late fees since you only have to remember one monthly due date.

Potential for lower interest rates

When you have multiple debts, you deal with multiple (often high) interest rates. With installment loan debt consolidation, you only have one debt. There is only one interest rate to remember and that more of the money you are paying out is being applied to your balance due, which means that you’ll be able to pay that debt off faster.

Improved credit score

Because a consolidation loan is used to pay off all your other debts, those accounts will be listed on your credit report as “paid” and show a zero balance, which is good for your credit score.

When your credit score goes up, you will qualify for lower interest rates on your debts, and you might be able to refinance your consolidation loan into something even easier to pay off!

How to consolidate your installment loan debt

So how do you do it? How does a person consolidate their installment debt?

Consolidating installment loans using credit card balance transfers with introductory rates

Credit card companies offer low interest rates when you transfer the balance of an existing account to your new card. The catch is that this interest rate is only offered for a set period — usually 6 to 12 months, and there will almost certainly be a balance transfer fee, but it will be lower than what you’d be paying in interest.

What is a balance transfer?

A balance transfer moves debt from a high-interest loan or credit card to a new card with a lower interest rate, ideally one with an introductory 0% rate. Even though you’re using a new loan to pay off old loans, you aren’t paying as much interest, so you’ll have more money available to put toward your debt.

If you pay that card all the way off within that time period, you will have potentially saved yourself tons of money in interest charges. But there’s a catch — eligibility can be tricky. You don’t have to have excellent credit to qualify for these offers, but creditworthiness does matter. You’ll probably need to have at least fair to good credit, or a FICO score higher than 630.

If you’re unable to at least make your minimum payments during the promo period, know that your lender may cancel the offer and resume charging you interest sooner than you expected.

What should I look for in a balance transfer offer?

  • The balance transfer fee: Most cards will charge 3% to 5% of the amount transferred
  • The introductory interest rate
  • The length of the promo
  • Does the credit card have an annual fee?
  • Who is the credit card issuer? You usually can’t transfer debts between the same issuer.

What will happen when the introductory period expires?

If you still have a balance due once the introductory period has passed, the company might tack on all of the interest fees you would have been charged to the balance you currently owe. This becomes your new balance due, and the credit card company will charge interest to it the way it would to any other purchase you made with the card. You could end up with a pile of credit card debt with a significantly higher annual percentage rate (APR), so if you’re unable to pay off the debt, be sure to have a backup loan option when the introductory term runs out.

For most offers, though, it won’t be the end of the world if you’re unable to pay off your entire balance during the promo period. Your remaining balance will simply begin to accrue interest at the new rate. Read your card agreement thoroughly to find out:

  • Your interest rate on the remaining balance once the introductory offer ends
  • How many payments you can miss before you lose the 0% APR promo

If you are sure you can pay the card off within the time provided, this is the best and cheapest way to consolidate your debts.

Where can I find a credit card with a low-interest balance transfer offer?

Many major credit card companies and financial institutions will offer an introductory rate. Citi and Discover usually have several options. Wells Fargo, Bank of America and U.S. Bank also will have some offers.

Still have questions about credit card balance transfers? Watch this and learn more:

Getting a debt consolidation loan

Debt consolidation loans work the same way that using a balance transfer does except that there is rarely an “introductory period” with a special interest rate. Another big difference is that the interest rate charged on these loans is typically higher than those used by credit card companies—particularly for borrowers with bad credit. The loan amount, repayment terms and loan term varies by lender, and some will get you the money as quickly as the next business day. You’ll almost certainly have to pay an origination fee. Investigate multiple loan offers to make sure you get the best rate available, which will depend on your financial situation. Make sure there’s no prepayment penalty.

Once you receive your debt consolidation loan, a lump sum will be deposited into your bank account or checking account. It is up to you to pay off each of your previous debt accounts.

There are a lot of bad actors out there who want to take advantage of someone looking to consolidate their debt. Make sure you thoroughly research each company you hope to work with before you send in your application.

What are some of the best debt consolidation loans?

Upstart

Upstart offers loans ranging from $1,000 to $50,000, with repayment terms of up to 5 years. Interest rates range from 6.86% to 35.99%.

Lightstream

Lightstream offers loans from 4.9% APR (with autopay) and a maximum amount of up to $100,000. You can take up to seven years to repay the loan.

Marcus

Marcus by Goldman Sachs offers loans of up to $40,000, and you can take up to seven years to repay. Interest rates range from 6.99% to 19.99%.

Consolidating installment loan debt using debt management plans

A debt management plan (or DMP) is exactly what it sounds like—a plan you make to manage your debt.

DMPs are done with the help of a professional, usually an expert in credit counseling. That professional will help you use your existing assets—like leveraging your home equity or retirement savings—to consolidate your debts and make them easier to resolve.

If you don’t have these assets, your DMP case manager will work with your lenders to settle your debts, try to find you the lowest rates, etc., then manage your payments for you.

For you, it will feel like a consolidation loan because you will only make one payment each month. In this case though, your DMP manager will take that single payment and allocate it across your existing accounts for you, until all your debts are paid off.

Debt consolidation vs. other ways to manage debt

If you don’t feel like debt consolidation is your best option, there are three other approaches you can take to manage your existing debts.

Debt avalanche

This is when you pay only the minimum balance due each month on each of your accounts and if you have any money left in your budget, you pay that extra money into the account with the highest interest rate. When that account is paid off, you allocate any extra money to the account with the next highest interest rate. The idea is that by paying down accounts with high interest rates, you’ll be paying your debts faster and for less money.

Debt snowball

This is the same basic premise as the debt avalanche. With the debt snowball, though, any extra money is put toward the smallest debt. The idea here is that by paying off debts quickly, you build momentum that you can use to squash your larger debts.

Is debt avalanche or debt snowball the right option for you? Learn more here.

Debt settlement

Debt settlement is an option if you know you cannot afford to pay the total amount you owe. Instead, you contact your lender and try to come up with a total amount due that you both can live with (and that is less than what you currently owe). 

Beware, though! Debt settlement can often cause your credit score to drop!

How can I pay off installment loan debt without consolidation?

Of course, debt consolidation via professionals and DMPs are just a couple of your options. You could also try any of the following methods:

  1. Ask family/friends for help
  2. Personal loans
  3. Credit builder loans
  4. Home equity loan or HELOC
  5. Refinance your vehicle
  6. Retirement account loans

Debt consolidation and your credit score

Your credit score will matter when you’re applying for a debt consolidation loan. Your credit will be checked with at least one of the three major credit bureaus — Experian, Equifax or TransUnion — and that score will determine the fixed rate you’ll pay to borrow the money. Before applying, review your credit reports at annualcreditreport.com, and make sure your credit history is accurate. Take the time to clear up any mistakes you find.

It is important to know that, in the beginning of the debt consolidation process, your credit score is likely to drop. The larger loan will impact your credit utilization ratio, and the credit check will usually cost you at least a few points. As you make your consolidation loan payments on time, however, your score will recover and even improve beyond what it was when you started.

FAQs

Why would I need an installment loan?

An installment loan is a good option if you’re struggling to pay off payday loans, tribal loans or other extremely high-interest debt and you have poor credit. You can consolidate those with other debts you may have, including medical bills or bills from emergency home improvements. This will merge all of your debts into the same loan, so you only have to make one monthly payment.

As you pay off your installment loan your credit score should increase, at which point you should be able to qualify for a debt consolidation loan with lower interest rates, that you can use to pay off the installment loan.

Can you go to court for not repaying your installment loans?

Yes. If you don’t repay, the lender or a debt collector can sue you to collect. If they win, or if you do not dispute the lawsuit or claim, the court will enter an order or judgment against you. That order will state the amount of money you owe.

Can you go to jail for not repaying an installment loan?

No. You will not go to jail if you don’t repay your loans. No creditor of consumer debt — including credit cards, medical debt, a payday loan, mortgage or student loans — have you arrested. You can be sued for unpaid debt, but you’ll end up in civil — not criminal — court.

Can I get a debt consolidation loan with bad credit?

If you have bad credit, work to improve your debt-to-income ratio. Try to increase your income with a side hustle, or pay off your smaller, more manageable debts. You can do this by increasing your income — with a side hustle or otherwise— and use the money to pay off some of your smaller, more manageable debts.

Also consider applying for a secured loan, which is more accessible to applicants with bad credit because they reduce the lender’s risk.

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