final verdict
Many lenders offer personal loans for debt consolidation, but our picks stand out. The best loan for you is one that will lower your overall cost with a lower APR and minimal fees. Discover and First Midwest Bank are great choices, both offering loans starting at less than 6% APR with no origination fees.
Your debt consolidation loan should also suit your situation, whether you need low monthly payments or have bad credit. Borrowers with credit scores below 600 may consider applying through Upgrade or Avant, which allow you to get help qualifying with a co-signer or co-applicant.
Guide to Choosing the Best Personal Loans for Debt Consolidation
Should you apply for a personal loan to consolidate your debt?
The debt repayment process can be long and costly. Every month you have debt, you are charged interest, which adds to your balance and extends the repayment date of your debt.
For someone working to get out of debt, debt consolidation can be helpful in many ways. If your credit scores have improved since you incurred your current debt, or if you have a co-signer or co-applicant, you may qualify for a loan with a lower APR than your current debt(s). Consolidating with a lower APR means lower fees and a shorter time to become debt free.
A personal loan from a reputable source, such as a bank, credit union, or established online lender, can be one of the most cost-effective ways to reduce debt. Compared to credit cards, payday loans, or even balance transfers, consolidation loans typically have much lower interest rates and fees.
If you’re struggling to pay your debts, a consolidation loan can help you in other ways. Debt consolidation could extend your payment schedule. While this increases the overall cost of repayment, it can also lower your monthly payments and help you balance your budget.
Before applying for a personal loan to consolidate your debts, it is important to determine what your goal is. Compare rates, fees and monthly payments to your current situation to decide if the loan meets your needs.
Comparison of personal lenders
It can be difficult to narrow down the field of potential lenders, but each offers something different. Here’s what to look for before applying:
- APR range: Consider both the minimum and maximum APR for loans, including any rate reductions you may be eligible for.
- Costs: Consider any upfront fees, such as origination or administration fees, and whether the fees will be withheld from your loan amount. Also be sure to consider prepayment penalties and other fees that may come into play in the future.
- Credit requirement: Check to see if the lender discloses the minimum credit score required to qualify and whether or not they will consider other information instead of good credit.
- Pre-qualification: Find out if you can be pre-qualified and receive a quote on the loan you qualify for, without a thorough credit investigation.
- Loan amounts: Calculate the total amount of debt you want to repay and check if the lender offers loans that cover the total amount.
- Loan conditions : Look at the term or how long you will have to repay your loan. Many lenders present this information as a range of months, such as 24 to 84 months. Note that a longer repayment term will result in lower monthly payments, but more money paid out for interest charges.
- Deadline for receipt of funds: Consider how long it takes from the start of your application to approval and receipt of funds. Although the lender can transfer funds in as little as one business day, it may take several days or longer for your bank or creditor to process payment.
- Loan Restrictions: Make sure the loans are available to residents of your state and the intended use of the funds is authorized by the lender. The lender may also have age and citizenship requirements.
How to apply for a personal loan
Once you have narrowed down your list of potential lenders, you will need to submit an application. Most lenders accept online applications, but you may be able to visit a physical branch or get help over the phone.
To complete an application, you will likely need to submit the following information:
- Contact details
- Income and employment details
- Social Security Number or ITIN
- Reasons why you are applying for the loan
- Desired loan amount
The lender can follow up by requesting more information. If your application is approved, you can review the offer before accepting it. You may also need to create an online account with the lender in order to manage your loan.
Be sure to note the due date for your first payment and, if desired or necessary, set up automatic payment. You can also change your due date.
Frequently Asked Questions
What is debt consolidation?
Debt consolidation involves using a loan or credit card to pay off multiple debt accounts, usually at a lower APR.
This is often done to reduce the overall cost of paying off debt, but it can be a good way to get immediate financial relief by reducing the cost of your monthly debt payments. It can also help by reducing the number of accounts you have to manage.
What are the advantages and disadvantages of obtaining a personal loan for debt consolidation?
Advantages
- Consolidate multiple debt payments into one monthly payment
- Reduce your APR and save money on the overall cost of debt repayment
- Potentially eliminate debt faster
- Set a clear debt repayment date
- Improve credit scores by paying down debt faster and reducing the use of revolving credit
The inconvenients
- Borrowers with poor credit may not qualify for better terms than their current debt
- Fees and interest can make consolidation loans expensive
- Extending debt repayment can lead to paying more over time
Are Debt Consolidation Loans Harming Your Credit?
Debt consolidation can affect your credit in many ways, but the effects are generally positive overall after enough time has passed. Applying for and opening a new loan account may result in a short-term drop in your credit scores, due to the thorough investigation and the new account. But paying off credit cards can lower your credit utilization rate, which can help boost your scores, and reducing the number of accounts with balances can also be good for scores. Making debt payments on time each month also helps build your scores over time.
What are the alternatives to a debt consolidation loan?
If you’re struggling with debt, a debt consolidation loan can be a good option that allows you to make one lump sum payment per month to one creditor rather than balancing several payments to several. However, if you have bad or good credit, or prefer not to go through the loan process, there are a few alternatives:
- Credit card balance transfer
- Negotiate with your creditors
- Establish a budget that takes debt repayment into account
- Consider a debt relief program
Although you can also take out a home equity loan or a loan on your 401(k), carefully consider the implications of doing so before using either of these options. You may find that the negatives outweigh the positives and that it may be better to use one of the other choices.
What is the difference between a debt consolidation and a balance transfer?
Debt consolidation involves paying off multiple accounts, usually with a single new loan. A balance transfer, on the other hand, is a feature of credit cards; it involves moving a balance from an account (of any type) to a credit card. You can transfer a single balance or, depending on the card issuer, you can transfer multiple balances, just like debt consolidation.
Credit card balance transfers may require an upfront fee, often 3% of the total amount you transfer. You’ll also pay interest charges each month on the balance you carry, unless you use a balance transfer card with a promotional 0% APR (this can be a great way to pay off debt). In comparison, a debt consolidation loan does not involve transfer fees, but will come with interest charges and may incur other fees, such as origination fees.
How We Choose The Best Debt Consolidation Loans
Our team evaluated 38 lenders and collected 1,520 data points before narrowing down our top picks. We weighted more than 20 criteria and gave a higher weight to those having a more significant impact on potential borrowers.
Top picks were selected based on factors such as membership requirements (15% weighted), average fixed APR (15% weighted), and average origination fee (10% weighted).
We also considered flexible repayment terms, useful features such as pre-qualification, and whether co-signer or joint applications are allowed to ensure borrowers have the best possible experience. For more information on our selection criteria and process, our full methodology is available.