Best Debt Consolidation Loan for May 2022
A debt consolidation loan can help simplify your life and save you money. Finding the best debt consolidation loan is a matter of matching your needs with the marketplace. At Bills.com, we have done the research and looked at debt consolidation lenders over a variety of factors, including rates, fees, repayment terms, and customer service. Our top recommendation is to check multiple lenders to find the loan that best meets your situation.
At Bills.com, we strive to help you make financial decisions with confidence. While many of the products reviewed are from our Service Providers, including those with which we are affiliated and those that compensate us, our evaluations are never influenced by them.
Compare Debt Consolidation Loans
2.49 - 19.99% with AutoPay
$5K - $100K
5.99 - 18.53% APR (with .25 % auto pay discount)
$5K - $100K
5.99 - 24.99%
$5K - $40K Loans are not currently offered in MA MS NE and NV.
6.99 - 19.99%
$3.5K - $40K
6.99 - 24.99%
$2.5K - $35K
7.98 - 35.99%
$1K - $50K Varies by state
9.95 - 35.99%
$2K - $35K
What's inside this article
- What is a Debt Consolidation Loan?
- What interest rate can I get on a debt consolidation loan?
- Can I qualify for a debt consolidation loan?
- Debt Consolidation Loans – Pros and Cons
- Debt consolidation loan alternatives
What is a Debt Consolidation Loan?
A debt consolidation loan is a loan you get to pay off multiple loans. Debt consolidation loans are useful when you have varying amounts of debt on varying items (car loans, credit cards, medical bills, etc.). The idea is to get a loan at a fixed and low-interest rate to pay off other debts. It typically reduces the total expense of debt.
Here is a brief explanation of the key terms around a debt consolidation loan:
Loan amount: Lenders offer a wide range of loan amounts. The minimum debt consolidation loan is about $5,000, although Upgrade provides loans as low as $1,000. The maximum amount varies, usually at least $35,000. Some lenders, like SoFi, offer large amounts, up to $100,000.
Term: The length of your debt consolidation loan is significant because it affects your monthly payment. Most debt consolidation loans are between 2-5 years, although some lenders, like Lightstream, offer up to 7 years.
Interest rates and APR: When shopping for a debt consolidation loan, lenders quote an Annual Percentage Rate (APR). APR is the yearly rate that lenders charge you to borrow money. APRs include the base interest rate of your loan plus all the fees that a lender charges you. The APR assumes that you don't pay the loan early.
What interest rate can I get on a debt consolidation loan?
A debt consolidation loan creates one monthly payment to pay off your debt quickly. The lower the interest rate, the more you save. Debt consolidation loans usually have fixed interest rates, and some lenders also have administration fees paid when you receive the money. To compare rates, check the APR, which compares loans based on rate, fees, and term.
According to the Federal Reserve, the average rate for a 24-month personal is about 9.5%. However, four factors heavily influence the interest rates for debt consolidation loans, including market conditions, location, loan amount, and loan term. Debt consolidation loans are repaid between 2-7 years—the shorter the period, the lower the interest rate, and the higher your monthly payment.
The most crucial factor that determines your interest rate is your credit score and credit profile. If you have an excellent credit score, expect to get top rates; however, if your credit score is fair, expect high rates.
Sample of debt consolidation loan interest rates by credit score
The table offers an idea of sample rates for a $7,500 debt consolidation loan repaid over three years.
|Credit Score||Range||Sample Rates - Fixed APR|
|Good||660 - 719||Upgrade: 16.99%|
|Fair||620 - 659||Avant: 19.95%|
|Bad||< 620||Avant: 29.95%|
Source: Bills.com and EvenFinancial rate table November 2020
Compare Latest Personal Loan Rates
Can I qualify for a debt consolidation loan?
Before approving your loan application, lenders want to know that you can make your monthly payments. The three major qualifying factors are your credit score, income, and credit history
Credit Score: Most debt consolidation companies have a minimum credit score. The higher your credit score, the easier to qualify. However, even if you have bad credit, you can still be eligible for a personal unsecured loan.
Income: Lenders look at the stability of your employment and income. Some lenders have a minimum annual income requirement. However, lenders also look at your overall situation by analyzing your debt to income ratio (DTI). Your overall DTI includes the payments for your housing (mortgage or rent) and recurring debt ( credit cards, personal loans, and auto loans).
Credit History: Your credit report has a record of your past payment history. Negative records such as judgments, bankruptcies, tax liens not only hurt your credit but also make it hard to qualify for a loan.
If you don’t qualify for a loan due to low income or a low credit score, some lenders allow you to add a co-borrower. Other lenders offer secured loans. Even if you qualify for a debt consolidation loan, consider if this is your best debt consolidation option, especially if you have bad credit or financial hardship.
Debt Consolidation Loans – Pros and Cons
Debt consolidation loans are a great alternative, especially if you qualify for a low-rate loan. However, there are other debt consolidation solutions, so make sure that it is a good fit.
- Simplifies your bill-paying schedule.
- Saves money with a lower interest rate, if you have good to excellent credit
- Boosts your credit score
- Doesn’t immediately reduce your debt
- Leaves you with the risk to run up new credit card debt
- Need a good credit score for the best rates.
Debt Consolidation Loan Tips
Here are four tips to help you find a debt consolidation loan.
1- Don’t damage your credit score: Check rate tables and submit multiple loan requests. Most lenders will pre-approve your request with only a soft pull on your credit.
2- Improve your chances to qualify: Before applying for a debt consolidation loan, improve your credit score. Also, pay off small debts and improve your debt to income ratio. If you have bad credit, then look into a loan with a co-borrower or a secured loan.
3- Do the math: Is the debt consolidation loan saving you money? Make sure that the lower interest rates, together with the administration fees, are saving you money. If you have extra cash, you might be able to get the same results or better with a debt snowball plan.
4- Do the math, part two: Can you afford the payment? Consolidating debt with a loan into a large unaffordable monthly payment is a bad idea. If the new monthly payment is too high, look for either a long-term home equity loan or a debt consolidation alternative that lowers your monthly payment.
Debt consolidation loan alternatives
If you have bad credit, a debt consolidation loan is not your only option. Three factors to consider when looking for an alternative to a debt consolidation loan with bad credit are the amount of debt you have, the amount you can afford to pay each month, and the level of your financial hardship.
Here are some bad credit debt consolidation loan alternatives that you can consider to improve your situation.
Home Equity Loan: If you own a home, have sufficient equity, and wish to lower your monthly payment, consider a home equity debt consolidation loan. You need to have a credit score of about 580. Also, your total loan to value ratio cannot exceed 80%. For example, if your home is worth $300,000, then your current mortgage and the additional new home equity loan cannot exceed $240,000. (Some lenders will go up to 85% LTV).
The following are not credit-based solutions.
Snowball Debt Payoff: If you can afford to make a significant monthly payment, but don’t qualify for a short-term debt consolidation loan, consider the debt snowball method. You pay off your debt quicker by adding to your current payments. Even though you don’t get a lower interest rate, you pay off your loan quicker and save money by making additional payments on your principal.
Debt Management Plan: If you can afford your minimum payments but are looking to reduce your interest rates, a debt management plan might help. A debt management company negotiates with your creditors (mainly credit card companies) to lower interest rates and fees for a monthly fee. You make one consolidated payment into a special account. The debt management company then transfers the appropriate sum to each creditor. Similar to a bad credit debt consolidation loan, your pay off your debt in about five years.
Debt Settlement: If you are in financial hardship and can't afford your monthly payments consider a debt settlement program. To qualify, you will need to show hardship. Otherwise, your creditors will most likely not negotiate an agreement. You stop paying your creditors, and your credit takes a hit. Your creditors potentially continue with collection efforts, including collection letters, calls, and a possible lawsuit. You make monthly payments into a special account in your name. When there are sufficient funds, the debt settlement company then negotiates a settlement. Your total costs might be around 75% of your original debt.
Bankruptcy: A more extreme debt consolidation loan alternative is bankruptcy. If you are in undue hardship, you can discharge your qualifying debts through Chapter 7 and hold on to protected assets. Chapter 13 bankruptcy is a court-supervised payment plan, whereby you pay back your creditors over four to five years. Bankruptcy protects you from lawsuits during this period. Bankruptcy is complicated, and it is recommended to consult with an experienced bankruptcy lawyer.
>>Are you struggling with debt?: Start your Free debt assessment. Get Started
APR is the yearly rate that lenders charge you to borrow money. APRs include the base interest rate of your loan plus all the fees that a lender charges you.
Repayment terms generally range from 2 to 6 years, though the exact range varies from lender to lender. If a lender approves you for a loan, it will almost always offer a better rate for a shorter length loan. A shorter time to pay off the loan will give you a larger monthly payment.
Lenders need to look at your income to qualify you for a loan. Be prepared to submit proof of income and to have your credit report pulled so the lender may review your debt-to-income ratio, credit score, and credit history.