Do Banks Do Debt Consolidation Loans?

Do banks offer debt consolidation loans?

Most banks today offer debt consolidation loans as a part of their services. For some, it is the cornerstone of their business.

A debt consolidation loan comes in many forms, but is most commonly structured as a personal loan. This is typically an unsecured loan, which means you do not put up collateral in exchange for funds.

Your APR may be higher because of the added risk. However, it may still be lower than the rates on your existing debts, especially credit card debt.

You can get this type of loan through traditional brick-and-mortar banks, such as Bank of America and Chase. Also popular are regional banks. These are mid-sized banks that serve a specific geographic area, like PNC Financial Services and Fifth Third Bancorp.

Online-only banks, such as SoFi, are also available. These online banks can offer more competitive rates because, without any branches, they have a lower overhead. They often pass these savings on to customers through lower rates or fewer fees.

Many of today's top banks also offer a wealth of resources to help you learn debt and money management strategies. This way, you can improve your credit while you pay off your loan.

» MORE: What is debt consolidation and should I consolidate?

Types of debt consolidation loans

Debt consolidation loans are commonly available as personal loans, but they can come in other forms as well.

Personal loans

A personal loan provides a one-time lump sum that you repay in set monthly payments. It combines all your debts into a single balance, giving you a single interest rate and one lender to manage.

To begin the debt consolidation process, you must use the lump sum to pay off all your debts. Sometimes the bank will do this for you, but first confirm with your individual institution.

Also, check introductory teaser rates. Often, banks advertise their lowest rate, but it may be temporary or contingent on conditions, such as signing up for autopay.

Be sure to read the terms and conditions carefully to ensure you understand the provisions surrounding your loan so you can plan accordingly.

“Consumers should look for an established lender that is transparent about costs, takes the time to understand their financial picture and offers a repayment structure that fits their long-term goals, not just the lowest advertised rate,” advised Tyler Crawford, the president of BHG Financial, based in Fort Lauderdale, Florida.

Home equity loans or HELOCs

If you own your home, you may be able to borrow against the equity you have built up. You can do this through a home equity loan or a home equity line of credit (HELOC).

• Home equity loan: A home equity loan provides an upfront fixed sum that you repay in monthly payments using a fixed interest rate. You can use the funds to pay off creditors and then repay the loan over time.
• Home equity line of credit: A HELOC also provides a lump sum that you can use for debt consolidation. However, while a home equity loan is a one-time loan, a HELOC is a revolving line of credit you can reuse as you pay debt off. It also typically uses a variable interest rate rather than a fixed one.

Because these are secured loans, they often have lower interest rates than unsecured personal loans. However, you take on significant risk because if you default, you could lose your home to foreclosure.

Also, closing costs may apply.

Credit card balance transfers

You can also use a credit card balance transfer to consolidate your debt onto a single credit card with either a zero-percent or low interest rate. You may even earn special rewards through your credit card company.

However, this low interest rate is usually temporary and typically increases after the promotional period ends. There may also be a balance transfer fee that applies.

This option is generally best if you have good to excellent credit.

Bank debt consolidation loan requirements

Bank debt consolidation loans have basic requirements, though they can vary by lender.

“Every lender has its own criteria, but most evaluate credit history, income, existing debt obligations and overall ability to repay,” said Crawford.

Before approving a loan, most banks require proper documentation, a minimum credit score, a specific debt-to-income ratio and sufficient equity.

Loan documents

Your lender will require that you submit certain documents when you apply for a debt consolidation loan.

For example, for a personal loan, Discover requires that you:

• Have a valid U.S. Social Security number 
• Be at least 18 years old
• Have an individual or household annual income of at least $25,000
• Have a physical address
• Have an active email address with access to a computer or mobile phone for the online application

You must also provide your:

• Proof of identity (driver’s license, state-issued ID, passport)
• Proof of address (utility bill, lease or rental agreement, bank or credit card statement or voter registration card)
• Bank account information
• Proof of household income (W2, 1099, pay stub or tax return)
• Employment history
• Creditor information, with balances and account numbers

Check with your lender to confirm there are no additional requirements, then submit your application. Most lenders offer quick loan approval decisions.

Credit score

A debt consolidation loan has pros and cons, but one advantage is that it is generally available even if you have fair or bad credit.

However, this varies by loan type and the lender's requirements. For example, U.S. Bank typically requires a FICO credit score of at least 660 for a home equity loan.

Debt consolidation credit requirements

Requirements can vary significantly depending on whether you choose a personal loan, a credit card balance transfer or a home equity loan.

Debt-to-income ratio

Your debt-to-income ratio is another factor that lenders consider when approving a bank debt consolidation loan. It compares your debt to your income.

To calculate your DTI ratio, add up all of your monthly expenses. This includes:

• Monthly rent or house payment
• Monthly alimony or child support payments
• Student, auto and other monthly loan payments
• Credit card monthly payments (use the minimum payment)
• Other debts

You then divide this by your pre-tax income to get your debt-to-income ratio. The lower your DTI, the less risk you pose to lenders.

How to calculate your DTI ratio

Total monthly debt payments / gross monthly income = Debt-to-income ratio

You may receive approval with a DTI ratio of up to 50%. For example, Fannie Mae permits a 50% DTI ratio when approved through automated underwriting.

However, this is rare. Most lenders, such as OneMain Financial and SoFi, follow the Consumer Financial Protection Bureau’s recommendation for a DTI ratio of 36% or lower.

Loan amount

Another consideration is your loan amount. Banks vary in how much they are willing to lend, so look for a lender that will let you borrow the full amount you need.

“For consumers consolidating larger balances, having sufficient loan amounts and longer repayment terms can create a more manageable monthly payment and a clearer path to financial stability,” said Crawford.

Equity

If you choose a home equity loan or HELOC, you must have sufficient equity in your home for approval.

Many lenders require 15% to 20% equity in your home. The amount you can borrow is then typically limited to a percentage of your home’s value. For example, Truist says you can borrow up to 75% to 90% of your home’s value with a HELOC and 80% to 90% with a home equity loan.

However, each lender has its own requirements, which can vary based on your loan terms.

Other considerations

Your loan-to-value ratio is another consideration. This compares the amount you borrow to your property's value.

For a debt consolidation loan, M&T Bank suggests having an LTV ratio of 80% or lower. However, this may vary by lender.

In addition to your home equity and LTV ratio, your lender will likely consider:

• Debt-to-income (DTI) ratio
• Credit score 
• Payment history
• Property type 
• Property condition/appraisal

For updated loan requirements, check with your lender.

Bank debt consolidation fees

In addition to interest, several loan fees may accompany your debt consolidation loan. 

• Prepayment penalty: If you pay off your loan in advance, your lender may assess a prepayment penalty. 
• Balance transfer fee: There may be a charge for transferring your balance to a credit card.  
• Origination fees: Most personal loans charge an origination fee for processing, which is typically 1% to 5% of the loan amount.
• Miscellaneous fees: Other fees may also apply. 
  • Late fees
  • Annual fees
  • Cash advance fee
  • Foreign transaction fee 
  • Returned payment fee 

Before committing to a debt consolidation loan with a bank, review all costs so you can budget properly.

Debt consolidation loans by top banks

These are some of the top debt consolidation loans from today’s leading banks.

Rates cont

Ultimately, your interest rate will depend on factors such as your credit score, debt-to-income (DTI) ratio and the equity you have in your home. However, typically the lower your credit, the higher your APR.

Bank debt consolidation loan alternatives

A debt consolidation loan is not your only option.

“Consumers should consider all their options when deciding what type of financial tools are right for them,” urged Crawford. “Depending on the situation, alternatives like a balance transfer card may be worth exploring.”

Alternatives to consider include:

• Cash-out refinance: A cash-out refinance lets you take out a new loan based on your home equity. However, like a home equity loan and HELOC, a cash-out refinance uses your home as collateral.
• Credit counseling: Many credit counselors work for nonprofit organizations such as The Financial Counseling Association of America (FCAA) and The National Foundation for Credit Counseling (NFCC), which can provide financial support.
• Debt management plan: With a debt management plan, you make a single lump-sum payment to a debt management company, which then forwards the appropriate payments to your creditors.
• Debt settlement: With a debt settlement, you can negotiate a lower debt by speaking with your lender directly.
• Debt payoff strategies: Employing a debt payoff strategy, such as the debt avalanche or snowball method, can help you pay down debt so you can qualify for a competitive loan.

Filing for bankruptcy should be a last resort, as this can stay on your credit report for up to 10 years. But this legal process can help you lower or eliminate your debts, whether you file Chapter 7 or Chapter 13.

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