$20,000 debt consolidation loan: How does it work?

You've got financial goals you want to reach, and you're ready to map out your action plan. At the top of the list is debt: you're ready to ditch it for good. 

A $20,000 debt consolidation loan could help you get there—and maybe help you save some money along the way. Debt consolidation helps you streamline debt payments so you can focus on how to make your dreams come alive. 

Sound good? Here's a closer look at how it works. 

What is a $20,000 debt consolidation loan?

A $20,000 debt consolidation loan is a lump sum of money you borrow to pay off other debts. For example, you might get a debt consolidation loan to pay off $20,000 in credit card balances. That leaves you with one payment to make to the loan each month. 

A debt consolidation loan could be secured or unsecured. 

Unsecured is financial speak for a loan that isn't attached to collateral, which is something of value that you own. You’d qualify based on your financial situation and credit standing. Most personal loans are unsecured. 

A secured loan is one that’s guaranteed by collateral (something valuable). Many homeowners use a home equity loan or home equity line of credit (HELOC) for debt consolidation. For either of those, your home is the collateral. That means if you fail to repay the loan, you could lose the home. Secured loans tend to cost less than unsecured loans. 

Who qualifies for a $20,000 debt consolidation loan?

Every lender is different when it comes to who's eligible for a $20,000 debt consolidation loan. Generally, you'll need to have:

• Good credit

• Steady income

• A low debt-to-income (DTI) ratio

Good credit generally means a FICO credit score of 670 or better, but it's possible to get a debt consolidation loan with a score below that range. A higher score sends the signal to lenders that you're less of a risk. 

DTI, meanwhile, measures how much of your paychecks go to debt repayment each month. 

Bottom line? Lenders want to know that you have the financial means to manage any new debt you take on and that you're likely to repay what you borrow. 

What's the monthly payment on a $20,000 debt consolidation loan?

Your monthly payments for a $20,000 debt consolidation loan are determined by your interest rate and loan term. 

Here are a few examples of what you might pay if you consolidate debt with a personal loan or a HELOC. 

At first glance, you'll see that the monthly payment for a $20,000 personal loan is higher. That's because you pay the loan off sooner. 

The HELOC has a five-year draw period followed by a five-year repayment period. So if you borrow $20,000 one time and take the full 10 years to pay it off, you could do that with the lower payment of $287 per month.

Now, what about interest? The $20,000 personal loan has a higher rate, but since the repayment term is shorter, you'll pay less in interest. The HELOC will cost you more interest, but you might be okay with that if you'd rather have a lower monthly payment. 

Pros and cons of getting a $20,000 debt consolidation loan

Debt consolidation loans could help you simplify your financial life and potentially pay off what you owe faster. Whether you should get one comes down to how it could help (or hurt) you. 

Here are some of the reasons to consider a $20,000 debt consolidation loan:

• If you use the new loan to pay off multiple debts, you'll have fewer payments to manage each month, which is great if you want less budget stress. 

• You may be able to get rid of your debt in less time if you get a lower interest rate but you keep paying the same amount each month. You could make more headway against the debt with each payment.  

• On-time payments on a $20,000 debt consolidation loan could help you build a positive credit history. 

Now, are there downsides? Maybe. For example, a high interest rate could make your debt consolidation loan more expensive. It also doesn't address why you got into debt. 

If you leave your credit card accounts open once you consolidate the balances with a loan, you might be tempted to use them again. That could leave you with even more debt to repay. 

A Debt Consultant can walk you through the pros and cons of debt consolidation to help you decide if it's right for you. If you have a financial hardship and can’t afford to repay your credit card debt, they may suggest alternative strategies, like debt resolution. 

$20,000 debt consolidation loan example

Still wondering if debt consolidation could work for you? Here are a few examples of how debt consolidation loans can help you turn your finances around. 

• Maria had $15,000 in credit card debt and $5,000 in medical bills. A $20,000 debt consolidation loan gave her one predictable payment, which helped to lower her stress. She paid the balance off in five years. 

• Jeremy owed $17,000 to credit cards and was tired of throwing money away on interest each month. He used his home equity to get a $20,000 HELOC to pay off the debt and make a few small home repairs. 

How a debt consolidation loan affects your credit and debt-to-income ratio

Debt consolidation loans can impact your credit in a few ways. First, there's the impact on your score when you apply for a loan. 

Loan applications usually trigger hard credit checks. That means a lender takes a closer look at your credit history, with your consent. Hard credit checks can knock a few points off your score. The effect only lasts for one year, and it fades during that time.

On the other hand, paying off your credit cards could have a positive impact on your credit score. Even if you owe the same amount of debt, installment loans don’t affect your credit scores the same way as credit card debt. 

What about your DTI? Your debt-to-income ratio could change for the better if your loan payments are lower after you consolidate. A lower DTI won't affect your credit score directly, but having more room in your budget could make you look more creditworthy in general. 

Achieve isn't a credit repair organization and doesn't provide or offer services or advice to repair, modify, or improve your credit. 

Steps to apply for a debt consolidation loan and compare lenders

If you think a debt consolidation loan makes sense, it helps to know where and how to get one. Here's a step-by-step breakdown of how to get a $20,000 debt consolidation loan.

1. Check your credit. If you don't know your credit score, give it a look. That can help you figure out what loans you're most likely to qualify for. Learn how to check your credit score for free. 

2. Review your budget. Do you know how much you can afford to pay monthly on a debt consolidation loan? Look at what you pay to the debts you want to consolidate now to get an idea of what payment amount you want to target. 

3. Get a rate quote. A rate quote lets you learn what kind of loan terms you might qualify for and the monthly payment you can expect. Many lenders offer rate quotes without a hard credit check, so you can research loans without risk to your credit standing.

4. Choose a lender. Plenty of lenders offer personal loans, but only one is right for you. As you compare lenders, check loan rates and terms, customer support, and added benefits, like rate discounts that could save you money. Achieve, for example, offers three types of discounts that could make your loan more affordable. 

5. Apply. Once you find a lender, it's time to apply. You'll need to tell the lender some personal and financial information, and give consent for a credit check. Some lenders offer same-day approval, while others may take a few days to process your application. 

Once approved, you'll wait for the lender to deposit the loan funds into your bank account. From there, you can pay off the debts you want to consolidate. Or you can work with a lender like Achieve, who will pay your creditors directly, so you have one less thing to worry about.