The best debt consolidation loans are typically personal installment loans with fixed interest rates and fixed monthly payments. As with other types of personal loans, debt consolidation loans are offered by many banks, credit unions, personal loan fintech companies, and other kinds of lenders. So if you're struggling with high-interest debt and hoping to turn your situation around, a debt consolidation loan could be what you need.
Key Takeaways
- Personal loans for debt consolidation offer a predictable way to get out of debt since they have fixed interest rates and fixed monthly payments.
- Many of the best lenders for debt consolidation loans are online, and they often let you check your likely interest rate and gauge your approval odds before you apply.
- Before you choose a debt consolidation loan, you should compare lenders based on their available loan amounts, repayment terms, loan fees, and eligibility requirements.
- There are also several alternatives to debt consolidation loans.
Factors to Consider Before Getting a Debt Consolidation Loan
You'll want to carefully assess your financial situation and find out your credit score before you start researching personal loans. After all, you need to know for sure that you could afford to make the monthly payments, and that you have a credit score that's high enough to qualify for a loan with better rates than you're paying now.
Consider these factors before you apply for debt consolidation:
- Available loan amounts: While lenders vary, you may be able to borrow between $1,000 and $100,000 for this purpose.
- Eligibility requirements: Some lenders extend financing only to people with very good to excellent credit, but others accept consumers with fair or even poor credit.
- Interest rates: Compare lenders based on the annual percentage rates (APRs) they offer to find the lowest rate you can qualify for.
- Loan fees: Watch out for origination fees, which are deducted from the loan amount you receive upfront, leaving you with less money to pay off your debts. Additionally, check for any prepayment penalties or other fees.
- Repayment terms: Find out how long you'll have to pay off your loan and keep in mind that your monthly payment can vary based on the repayment term you choose. Typically, the longer the repayment term, the less you'll have to pay each month, but the more you'll pay in total interest over the life of the loan.
Tip
If you don't know your credit score, you can often obtain it free of charge from your bank or credit card company. There are also online sources for free credit scores.
Best Lenders for Debt Consolidation Loans
The chart below highlights some of the best debt consolidation loans available today, how much funding they offer, repayment terms, and current interest rates.
| Best For | Loan Amounts | Repayment Terms | APRs | |
| Discover | No fees | $2,500 to $40,000 | 36 to 84 months | 7.99% to 24.99% |
| Happy Money | Improving credit | $5,000 to $40,000 | 24 to 60 months | 11.72% to 17.99% |
| LightStream | Borrowers with excellent credit | $5,000 to $100,000 | 38 to 84 months | 6.99% to 25.99% |
| SoFi | Unemployment protection | $5,000 to $100,000 | 24 to 84 months | 8.99% to 29.49% |
| Upgrade | Borrowers with imperfect credit | $1,000 to $50,000 | 24 to 84 months | 8.49% to 35.99% |
How to Apply for a Debt Consolidation Loan
Applying for a personal loan for debt consolidation is a relatively simple process. Here are the steps involved:
- Step 1: Compare lenders: Spend some time comparing lenders based on their available loan amounts, repayment terms, interest rates, fees, and other factors. Narrow your list down to three or four lenders.
- Step 2: Check your rate with several lenders: You should be able to get pre-approved with a few lenders without triggering a hard inquiry on your credit reports. (A hard inquiry can have a negative impact on your credit score.) Doing so will help you determine which lenders might offer you the funding you need with the best rates and terms.
- Step 3: Provide personal and financial information: Move forward with an application with the lender you select. You'll need to provide a variety of information, such as your employment status and annual income.
- Step 4: Submit any additional documentation that's required: You may be asked to upload certain documentation for your loan application, including pay stubs, income tax returns, or bank statements.
- Step 5: Wait for an answer: Many lenders will provide you with an answer within a few hours, while others may take a few business days.
- Step 6: Watch for your loan funds. If you're approved, the money may be sent directly to your bank account, so keep an eye on your balance. However, some lenders will instead pay off your other loans directly.
Alternatives to Debt Consolidation Loans
If you're on the fence about consolidating debt with a personal loan, there are several other loan options to consider. These include:
- Balance transfer credit cards: A balance transfer credit card will let you consolidate your existing credit card debt at interest rates as low as 0% APR for a certain period, such as 12 months. After that, the card's regular variable APR will apply. Typically, these cards also charge upfront balance transfer fees (usually 3% or 5% of the amount you transfer).
- Home equity loans: Home equity loans are similar to personal loans in that they have fixed interest rates, fixed monthly payments, and set repayment terms. However, these loans require that you have sufficient equity in a home and are willing to use it as collateral. If you can't repay the loan, your home can be subject to foreclosure.
In addition to other types of credit, there are some additional ways to begin reducing the amounts you owe. They include:
- Credit counseling: Many not-for-profit credit counseling agencies offer free consultations and help in figuring out a plan for your debt. If you go this route, the Federal Trade Commission (FTC) says to vet organizations you find with your state attorney general and local consumer protection agency.
- Debt management plans: These plans are offered by third-party companies, and they require you to make a single payment to them so they can pay back your creditors. These companies also work with your creditors to get you lower rates and fees with the goal of helping you pay down debt faster. But make sure you're dealing with a reputable one.
- Debt settlement: These plans are also offered by third-party companies. Typically, they ask you to stop making payments on your credit cards and other debts and make a payment to a savings account in your name instead. Funds that are built up in that account will eventually be used to settle debts for less than you owe. At least, that is how it is supposed to work. However, there are many risks involved with debt settlement, including the potential for considerable damage to your credit. In addition, your creditors aren't required to settle and may sue you.
What Are the Most Important Factors to Consider Before Getting a Debt Consolidation Loan?
Before you take out a debt consolidation loan, you should make sure you're financially prepared to keep up with the monthly payments. Otherwise, you may find yourself in even more debt. Also compare lenders based on their available loan amounts, repayment terms, interest rates, fees, and other factors.
How Can You Improve Your Chances of Getting Approved for a Debt Consolidation Loan?
You can improve your chances of getting a debt consolidation loan by working to raise your credit score. You can also boost your approval odds for a loan by adding a co-signer who has good credit, although not all lenders allow that.
How Do Origination Fees Work?
Origination fees for personal loans are deducted from your loan proceeds upfront, although you still have to repay the full amount of the loan. If you take out a $10,000 loan with an origination fee of 5%, for example, you'll receive $9,500 in funding but have to repay $10,000 plus interest charges. Not all personal loans charge these fees, and you may be able to avoid them if you have a solid credit score.
Does a Debt Consolidation Loan Hurt Your Credit?
As long as you make your payments on time, a debt consolidation loan won't hurt your credit and may actually help it. The opposite is also true: If you fail to make the loan payments on time, your credit score could take a serious hit.
The Bottom Line
A debt consolidation loan can reduce the amount of interest you're paying on your debts and allow you to pay them off more quickly. The best loans are easy to find online, and most lenders are relatively transparent when it comes to their available loan amounts, fees, interest rates, and eligibility requirements.
Article Sources
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Federal Trade Commission, Consumer Advice. "Home Equity Loans and Home Equity Lines of Credit."
Federal Trade Commission, Consumer Advice. "How to Get Out of Debt."
