Key takeaways

  • Debt consolidation can be accomplished with a personal loan or credit card, depending on your needs.
  • Competitive rates typically go to those with good to excellent credit — FICO credit scores of 670 or more.
  • Look for an interest rate that is on average lower than those of your current debts to get the best deal.

Debt consolidation involves combining multiple debts into a single account to reduce the number of bills you pay each month. Ideally, you also lower the overall interest rate and can ultimately pay off the debt more quickly.

Considering taking out a debt consolidation loan to help you pay down debt faster? You need to evaluate your finances and credit score to determine which consolidation method is the best for you. Take time to understand how debt consolidation works before applying.

How to choose a debt consolidation loan: Factors to compare

When choosing the right lender for you and your needs, consider the type of loan, interest rates, fees and repayment options, among other features.

Type of loan

There are multiple debt consolidation options to choose from, each with its pros and cons. Selecting the best option for your needs is important as it will help guide the type of lender you choose.

When it comes to consolidating debt, these are the most common types of loans you’ll encounter:

  • Many lenders offer personal loans designed to help you pay off debt faster and save on interest.
    These loans, often called debt consolidation loans, come with a fixed interest rate and repayment term.The idea is to pay off your outstanding debt with the loan and then make a single payment each month.
  • Also known as balance transfer credit cards, these cards offer an interest-free introductory period, typically ranging from 12 to 18 months. They are generally reserved for consumers with good or excellent credit. Only consider this option if you can pay off the new card during the introductory period. You’ll face typical credit card rates after.
  • You can convert up to 85 percent of your property’s equity into cash and use it to consolidate debt with a home equity loan. It acts as a second mortgage with a five-year repayment period of five to 30 years. The interest rate is also fixed and lower than most credit cards. The major drawback is that your home acts as collateral. You could lose your property if you fall behind on the loan payments.
  • A HELOC is like a home equity loan — but you won’t receive the loan proceeds in a lump sum. They work more like a credit card. You can pull from funds as needed, up to a set limit, during the draw period. Interest-only payments are required during the draw period on most HELOCs. Once it ends, you’ll repay in monthly installments over a term of 10 to 20 years.

Approval requirements

As with all financial products, your credit score is important in determining if you qualify. Pay attention to each lender’s credit score requirements. Lenders also set a maximum debt-to-income (DTI) ratio.

Both factors will allow you to select lenders that work with borrowers with your credit profile. This could save you time. You won’t be applying to lenders who are highly unlikely to approve you.

Loan amounts

Before choosing a debt consolidation lender, you must determine how much debt you must consolidate. Check your debt balances and request payoff amounts, which will be slightly higher than your current balance. Once you have this number for each debt you want to consolidate, you can look for a new lender.

Lenders cap the amount you can borrow. Make sure to check the max beforehand so you can consolidate all of your accounts with a single new one.

Interest rates

Even if a lender has a low starting rate, it will be reserved for those with excellent credit. Instead, check the maximum annual percentage rate (APR) a lender charges to be sure a loan will still be affordable even if you don’t qualify for the lowest rates.

For a sense of what interest rate you might get, make sure you prequalify with multiple lenders you think will best suit your needs. Prequalifying will allow you to see your eligibility without damaging your credit.


Almost every lender will charge a fee to borrow. These often include late fees, origination fees or prepayment penalties. However, some lenders do not charge any fees. If you have good to excellent credit, you may be able to qualify with one of these — or at least work with a lender that has fees on the lower end of the spectrum.

Some fees, like late fees, are avoidable and depend entirely on your ability to make on-time payments. Others, like origination fees, are determined by the amount you borrow.

A lender may charge anywhere from 0 percent to 12 percent of the amount you request as an origination fee, and it will be subtracted from your final loan amount. Make sure to factor in the origination fee when deciding how much to borrow.

Repayment options

You will need to pick a lender that offers terms to suit your monthly budget. But beyond the payment, you need to calculate the total cost of consolidating and compare it to the cost of paying each account individually. If you aren’t careful, you may end up paying more in interest by consolidating than you would if you kept your debts separate.

Remember that the longer your loan term, the more time there is for interest to add up. Pick a shorter loan term to lower the total amount you pay. Just ensure you can afford the monthly payments and manage the loan.

Unique features

Many lenders offer special features specific to their products. Figure out what is important when deciding what perks sweeten the deal.

One to look out for when comparing debt consolidation loans is lenders that offer direct payments to creditors. Additionally, some may offer rate discounts for things like enrolling in automatic payments, which can make your loan even more affordable.

Customer service

If navigating technology isn’t your strength, you may prefer working with a lender offering in-person support. Borrowers who prefer the convenience of online support should look for lenders that boast virtual assistance options.

Debt consolidation loan interest rates

A debt consolidation loan can provide a lower interest rate than most credit cards. According to Bankrate data, the average personal loan currently has an interest rate of around 12 percent. That said, interest rates on debt consolidation loans range from about 7.5 percent to 36 percent. If your credit score is fair or poor, you may see rates toward the top of the range.

Your credit score, debts and monthly income can influence the interest rate and terms of the loan.

You will likely receive average rates with a FICO score of around 670. For the lowest rates, you often need a credit score between 800 and 850.

Lenders will also consider factors like your citizenship status, involvement in bankruptcy or foreclosure proceedings, DTI ratio and income.

With less-than-stellar credit, you may get a more competitive rate through a secured loan. Since these loans require collateral for approval, they tend to offer lower interest rates compared to unsecured loans. However, if you default, the lender may take your collateral to recoup its investment.

Next steps

Before you apply for a loan or credit card to consolidate your debt, decide which type of debt consolidation or alternative makes the most sense. Get prequalified with at least three lenders to view potential loan costs and compare your options. Doing so will enable you to make an informed decision.