Bankrate's guide to choosing the best debt consolidation loans
As of Saturday, October 31, 2020
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When shopping for the best debt consolidation loan, look for the lowest interest rate, a loan amount that meets your needs, an affordable and workable repayment term and low to no fees. Loan details presented here are current as of the publish date. Check the lenders’ websites for more current information. The top lenders listed below are selected based on factors such as APR, loan amounts, fees, credit requirements and broad availability.
Best debt consolidation loan rates in October 2020
| Best Egg |
5.99%–29.99%
|
3–5 years
|
$2,000–$35,000
|
High-income earners with good credit
|
| Payoff |
5.99%–24.99%
|
2–5 years
|
$5,000–$40,000
|
Consolidating credit card debt with below-average credit
|
| LightStream |
5.95%–19.99% (with autopay)
|
2–7 years
|
$5,000–$100,000
|
High-dollar loans and longer repayment terms
|
| PenFed |
6.49%–17.99%
|
1–5 years
|
$600–$20,000
|
Smaller loans with a credit union
|
| OneMain Financial |
18.00%–35.99%
|
2–5 years
|
$1,500–$20,000
|
Fair to poor credit
|
| Discover |
6.99%–24.99%
|
3–7 years
|
$2,500–$35,000
|
Good credit and next-day funding
|
| Upstart |
7.98%–35.99%
|
3–5 years
|
$1,000–$50,000
|
Consumers with little credit history
|
| Marcus by Goldman Sachs |
6.99%–19.99%
|
3–6 years
|
$3,500–$40,000
|
Consolidating large debts
|
Summary: debt consolidation loans in 2020
What is a debt consolidation loan and how does it work?
A debt consolidation loan is a type of personal loan that can help you combine several high-interest debts into a new (hopefully lower-rate) loan. When managed responsibly, a debt consolidation loan can help you save money on interest and potentially get out of debt faster.
With a debt consolidation loan, you'll apply for a loan for the amount that you owe on your existing debts. Once you're approved for the loan, you'll receive the loan funds and use them to pay off your credit cards or other loans. In some cases, the funds can be sent directly to your creditors. From there, you'll begin making monthly payments on your new loan.
In addition to the possibility of saving money on interest, a debt consolidation loan comes with another big potential perk: If you use a consolidation loan to pay off multiple debts, especially credit card accounts, the decision might have a positive impact on your credit score.
Credit scoring models, like FICO and VantageScore, place a lot of weight on your credit utilization ratio (the relationship between your credit card limits and balances). When a new consolidation loan has the effect of lowering your credit utilization ratio, your credit score might climb as a result.
Of course, you’ll need to avoid making late payments or charging your credit card balances back up again on your recently paid-off accounts. Otherwise, you could put your credit into a worse position.
How high interest rates affect your debt
When you pay back a loan, you're not just paying back the amount you borrowed — you'll also pay an additional sum each month in the form of interest. If you have a high interest rate, you'll be charged more on your outstanding balance, so it could take longer for you to pay off your debt.
Let's say you have $5,000 in credit card debt and a card that requires a minimum payment of 2 percent of your balance. Using Bankrate's credit card calculator, you can see that your minimum payment starts at $100. If you have a 5 percent interest rate on that card, roughly $20 of your minimum payment would go toward interest and $80 would go toward your principal.
If you have an 18 percent interest rate, however, $75 of your payment would go toward interest and only $25 toward the principal. This would also more than double the amount of time it would take to pay off the loan, and the amount of interest you would pay during the repayment period would exceed the initial credit card balance.
Average debt consolidation loan rates
A debt consolidation loan is a type of personal loan. As of Aug. 5, 2020, the average interest rate on a personal loan is 11.88 percent.
Interest rates on personal loans commonly range from around 6 percent to 36 percent. In general, a higher credit score will help you qualify for a lower interest rate. However, keep in mind that lenders may consider other factors when you apply for a consolidation loan, such as your income, existing debt obligations and more.
What are the pros and cons of a debt consolidation loan?
Pros:
- It can save you money. If you have several credit cards with double-digit interest rates and you qualify for a debt consolidation personal loan at a lower rate, you can save a heap of money in interest and fees you may be charged.
- It simplifies your finances. Debt consolidation loans combine multiple debts into one monthly payment. The loans have fixed rates and a set repayment term, so your monthly payments stay the same and you know when the debt will be paid off. Credit card rates are variable, so your monthly payments differ, depending on your balance, and it’s hard to know when your debts will be paid off.
- No collateral is required. Debt consolidation loans are typically unsecured. This means that you don’t have to put up an asset, such as your house or car, to back the loan.
- It can boost your credit score. If you use a consolidation loan to pay off multiple revolving credit card balances, there’s a chance that you could lower your credit utilization rate and improve your credit score by extension.
Cons:
- You run the risk of going into deeper debt. Unless you can rein in the spending that got you into debt in the first place, a debt consolidation loan will not help you. If you use the loan to pay off your credit cards then start running up card balances again, you’re digging yourself into a deeper debt hole.
- The monthly payments can be high. Because you are paying off several debts with the loan, your monthly payments can be steep — it’s not like making minimum monthly payments on several credit cards. You have to be sure you can handle the payments until the loan is repaid.
When does a debt consolidation loan make sense?
A debt consolidation loan may be a good fit if it can help you accomplish worthwhile financial goals. If you’re considering a debt consolidation loan, some helpful questions to ask include:
- Can I qualify for a lower interest rate?
- Will my monthly payment obligation be lower?
- Is there a chance a debt consolidation loan could help my credit score?
Did you answer yes to any of the three questions above? If so, it might be worth doing some initial research to see if you can prequalify for any attractive loan offers.
“If you currently have multiple debt obligations that you are juggling, a consolidation loan can be a way to simplify your life and possibly save on interest costs,” says Greg McBride, CFA, Bankrate chief financial analyst. “A good candidate is a borrower who has steady income, decent credit, a discipline to refrain from running up more debt and a desire to pay off what is currently owed.”
What to do before applying for a debt consolidation loan
Before you fill out an official loan application, it’s best to do a little homework in advance. Below are four important steps you should take prior to applying for a debt consolidation loan.
- Check your credit reports and scores. It’s always wise to check your credit reports and scores before you apply for any type of financing, debt consolidation loans included. The condition of your credit is one of the primary factors that will determine whether you can qualify for financing and what interest rate and terms lenders are willing to offer you.
- Dispute any credit reporting errors you find. If you discover mistakes on your credit reports, you should dispute them with the credit reporting agencies. Credit reporting errors have the potential to damage your credit score and can make it difficult to qualify for an attractive consolidation loan.
- Figure out how much you can afford to pay each month. This home budget calculator may help if you don’t already have a budget that you use each month. You should also take a look at how much you have been paying monthly on your existing debts, since, ideally, your goal will be to replace those monthly payments with a new one.
- Search for potential lenders. Now that you know the condition of your credit and how much money you hope to borrow, you’re ready to begin searching for lenders that may be a good fit for your situation. Credit score requirements vary by lender, but many lenders want a borrower with a FICO score of at least 650. However, some debt consolidation loan companies work with consumers with scores in the low 600s or even high 500s, so don’t assume that a lower credit score will disqualify you.
What are the requirements to qualify for a debt consolidation loan?
All lenders have their own requirements for potential borrowers. A common requirement is a credit score in the mid-600s, but some lenders may also look for a minimum annual income and a low debt-to-income ratio — the portion of your income that goes toward existing debts.
Even if you have bad credit, you may be able to find a lender that's willing to extend a loan, although you'll be offered higher interest rates. If you're in this scenario, you may want to try applying with a co-signer who has good credit. Having a good-credit co-signer improves your overall credit picture, although keep in mind that the co-signer shares some responsibility for the loan if you fail to make payments.
How to get a debt consolidation loan
Now that you’re ready to start comparing lenders, here are some basic steps that should help you find the best deal for your situation.
- Shop around for the best loan rates and terms. Lenders that offer prequalification with only a soft credit check can be extremely helpful here; they allow you to view rates based on your credit rating and other factors without damaging your credit score.
- Choose your ideal lender. Then fill out the application and provide the requested documentation. If the lender preapproves you and you agree to a loan offer, the next step will be a “hard inquiry” on your credit report. A hard inquiry does have the potential to affect your credit score slightly.
- Receive the loan funds. Technology makes it possible to apply for a loan, get approval and have the loan money deposited into your account within a few business days. However, this time frame varies between lenders. Sometimes it can take a week or longer to receive your loan proceeds, depending on the lender and other factors.
- Repay the loan as promised. If you make late payments, you risk damaging your credit and paying more money than you anticipated.
How to choose the best lender
The best way to choose your lender is to take the time to shop around and compare loan offers. Some factors you’ll want to compare include:
- Loan APR. Start your search with lenders that advertise low rates, but understand that the lowest rates go to people with a high credit score. The best way to compare APRs is to get a quote from a few lenders.
- Fees (origination, prepayment penalty, etc.). Things like origination or application fees can add significantly to the cost of your loan, so make sure that you factor them in when comparing rates.
- Loan amounts. It's smart to only borrow what you need; if you have a few hundred dollars in credit card balances, you'll want to choose a lender with low loan amounts. If you have lots of accumulated debt, look for lenders with loan amounts that will suit your needs.
- Repayment terms. Choosing a longer repayment term will lower your monthly payment but will increase the amount of interest you pay. Use a loan calculator to see how different repayment terms could affect your monthly budget.
- Extra features or benefits. Additional perks may be the deciding factor in your choice of lender. Some things to look for are discounts, educational resources, hardship policies and customer service options.
If a lender will allow you to prequalify and get a rate quote with only a soft credit inquiry, take advantage of the opportunity. Prequalifying with multiple lenders can better equip you to make an apples-to-apples comparison about the overall cost of the loan. Tools like Bankrate’s debt consolidation calculator can also be helpful.
Details: debt consolidation loan rates in 2020
Best for high-income earners with good credit: Best Egg
Overview: Best Egg offers unsecured personal loans for a variety of purposes, including debt consolidation. The best rates and terms go to borrowers who earn $100,000 or more and have a credit score of at least 700, which is “good” on the FICO scale. Some borrowers can qualify to borrow up to $50,000, although most loans range from $2,000 to $35,000.
Perks: There is no penalty if you pay off your consolidation loan ahead of schedule. Application and approval are done online, and it’s possible to get your money within a single business day.
What to watch out for: Origination fees range from 0.99 percent to 6.99 percent, and the fee is taken off the top of the loan. So, if you borrow $10,000 and pay a 1 percent origination fee, $9,900 will be disbursed to you, but you still pay back $10,000. There is also a $15 fee for late payments.
| Best Egg |
| 4.7 / 5.0 |
| 640 |
| 5.99%–29.99% |
| $2,000–$35,000 |
| 3 to 5 years |
| Not specified |
| Origination fee: 0.99% to 6.99% of loan amount;
Late fee: $15; Returned payment fee: $15 |
Read Bankrate's expert Best Egg Review
Best for consolidating credit card debt with below-average credit: Payoff
Overview: Payoff is different from other lenders in that its personal loans can only be used to consolidate credit card debt. The application and approval process are done online.
Perks: There are no application fees, prepayment penalties, late fees or annual fees. Borrowers with a credit score of 640 or higher may qualify. As with any debt consolidation loan, there’s a chance that you can raise your credit score if you abide by the terms of your loan.
What to watch out for: Origination fees range from 0 percent to 5 percent. Additionally, Payoff does not issue loans in Massachusetts, Mississippi, Nebraska or Nevada.
| Payoff |
| 4.6 / 5.0 |
| 640 |
| 5.99%–24.99% |
| $5,000–$40,000 |
| 2 to 5 years |
| Not specified |
| Origination fee: 0% to 5% |
Read Bankrate's expert Payoff Review
Best for high-dollar loans and longer repayment terms: LightStream
Overview: LightStream offers unsecured, fixed-rate debt consolidation loans as big as $100,000, with up to seven years to repay. But you must have excellent credit and sufficient assets and income to qualify for a jumbo-size personal loan.
Perks: There are no origination fees or penalties for paying off your consolidation loan early. The application and approval process is done online, making it possible to get approved and have the money deposited into your account on the same day.
What to watch out for: You must have a credit score of at least 660 to qualify, and loans set up without automatic payment are 0.5 percentage points higher.
| LightStream |
| 4.6 / 5.0 |
| 660 |
| 5.95%–19.99% (with autopay) |
| $5,000–$100,000 |
| 2 to 7 years |
| Not specified |
| None |
Read Bankrate's expert LightStream Review
Best for smaller loans with a credit union: PenFed
Overview: Pentagon Federal Credit Union, known as PenFed, offers unsecured, fixed-rate personal loans for debt consolidation. Credit unions generally have lower costs and fees than other lenders because they are not-for-profit businesses owned by their members.
Perks: PenFed does not charge origination fees, annual fees or prepayment penalties. You can borrow as little as $600. The application and approval process can be done online or at one of PenFed’s branches, with approval in as little as one business day.
What to watch out for: You must become a member of the credit union to receive a loan, and there is a charge of $29 for each late payment.
| PenFed |
| Not specified |
| 6.49%–17.99% |
| $600–$20,000 |
| 1 to 5 years |
| Not specified |
| Late fee: $29; Returned payment fee: $30 |
Overview: OneMain Financial offers unsecured, fixed-rate personal loans to consumers with damaged credit. Loan amounts are smaller and rates are higher than typical debt consolidation personal loans, but the lender is still a good alternative to risky payday lenders. Your credit history, income and debt load determine whether you qualify.
Perks: There is no penalty for paying off the loan early. If you do not qualify for an unsecured personal loan, OneMain may accept your car, boat, RV or motorcycle as collateral, provided it is insured and is appraised at a sufficient value.
What to watch out for: OneMain charges an origination fee, which varies by state, and rolls it into the monthly payments. Late fees also vary by state. OneMain Financial does not operate in Alaska, Arkansas, Connecticut, Massachusetts, Rhode Island and Vermont. Additionally, borrowers in Florida, Iowa, Maine, Mississippi, North Carolina, Texas and West Virginia have unsecured loan limits of $7,000 to $14,000.
| OneMain Financial |
| 3.7 / 5.0 |
| Not specified |
| 18%–35.99% |
| $1,500–$20,000 |
| 2 to 5 years |
| Not specified |
| Origination fee: 1% to 10% or $25 to $400;
Late fee: $5 to $30 or 1.5% to 15%; Nonsufficient funds fee: $10 to $50 |
Read Bankrate's expert OneMain Financial Review
Best for good credit and next-day funding: Discover
Overview: Discover offers unsecured personal loans for debt consolidation, with the option to pay creditors directly. The average Discover borrower has very good credit.
Perks: Discover personal loans have no origination fees, closing costs or prepayment penalties. It’s possible to get an approval decision the same day you apply and get your money the next business day, provided your application is accurate and complete.
What to watch out for: There is a $39 penalty for late payments, which is higher than the late fee for many other lenders. Co-signers are also not permitted.
| Discover |
| 4.8 / 5.0 |
| 660 |
| 6.99%–24.99% |
| $2,500–$35,000 |
| 3 to 7 years |
| $25,000 |
| Late fee: $39 |
Read Bankrate's expert Discover Review
Best for consumers with little credit history: Upstart
Overview: Upstart offers unsecured personal loans for debt consolidation to consumers who don’t have much credit history but have a regular income. Upstart considers an applicant’s education, area of study, earning potential and job history.
Perks: Upstart does not charge prepayment penalties. The initial application generates a soft credit pull that does not hurt your score, and you can get your loan money in one business day after approval.
What to watch out for: You must have a U.S. bank account. Upstart also charges origination fees of up to 8 percent, which is steep.
| Upstart |
| 4.5 / 5.0 |
| 600 |
| 7.98%–35.99% |
| $1,000–$50,000 |
| 3 or 5 years |
| Not specified |
| Origination fee: Up to 8%; Late fee: The greater of 5% of the unpaid amount or $15; Returned check fee: $15 |
Read Bankrate's expert Upstart Review
Overview: Marcus by Goldman Sachs offers unsecured personal loans for debt consolidation to consumers who don’t have much credit history.
Perks: You can change the due date of your monthly bill up to three times during the life of the loan, and the $40,000 loan limit can accommodate borrowers with a lot of debt to consolidate.
What to watch out for: No co-signers are allowed, and it can take five days to receive your loan funds. Consumers with lackluster credit may not qualify.
| Marcus by Goldman Sachs |
| 4.7 / 5.0 |
| Not specified |
| 6.99%–19.99% |
| $3,500–$40,000 |
| 3 to 6 years |
| Not specified |
| None |
Read Bankrate's expert Marcus by Goldman Sachs Review
Tips for making the best use of your loan
Once you have your debt consolidation loan, it's best to follow a few rules of thumb:
- Pay off your debt immediately: It may be tempting to use your loan funds for something fun, but you took out the loan for a reason. As soon as you receive your funds, use them to pay off your credit card and other loan balances in full.
- Make timely payments: You'll enter your repayment period as soon as you receive your loan, and it's important to stay on top of your monthly payments. Making late payments or missing payments entirely will sink your credit score and push you even further into debt. If you need to, set a monthly calendar reminder or request automatic payments.
- Stay on top of other debt: A debt consolidation loan won't do much good if you immediately begin accumulating debt on the credit cards you paid off. Wherever possible, try to limit spending and set a budget to make sure that you can manage all of your payments.
Debt consolidation loan vs. balance transfer credit card
Sometimes, it may be cheaper to consolidate your debt with a 0 percent balance transfer credit card offer. With a balance transfer card, you shift your other credit card debt to a new credit card with a 0 percent introductory rate. The goal with a balance transfer card is to pay off that balance before the introductory rate expires, saving money on interest in the process. (When you calculate potential savings, don’t forget to factor in balance transfer fees.)
Keep in mind that using a balance transfer card to pay off existing credit card debt likely won’t lower your credit utilization as effectively as a debt consolidation loan. As a result, a balance transfer card might not initially have the same positive impact on your credit score. Additionally, a debt consolidation loan may be a better way to stay disciplined with paying off debt, since you'll have fixed monthly payments throughout the life of your loan.
Alternatives to debt consolidation loans
Debt consolidation loans can be useful, but they’re not the perfect fit for everyone. If you’re looking for alternatives to debt consolidation loans, the list below breaks down some additional options you may want to consider.
Tapping into home equity
One popular way people pay off existing debt is tapping into the equity in their home. Home equity loans and lines of credit often allow borrowers to secure lower interest rates by using their homes as collateral in exchange for financing. Just be sure to factor the risks as well if you’re considering this option. If you can’t afford to make your payments as agreed, the lender may be able to seize your home.
Debt relief services
Debt relief services, commonly referred to as debt settlement companies, offer another way to deal with your debt if you’re in over your head and can’t qualify for a consolidation loan. These companies can reach out to your creditors and debt collectors on your behalf in an effort to settle what you owe for a lesser amount.
If you decide to pursue debt relief services (perhaps as an alternative to bankruptcy), you should be aware that the fees these companies charge can be steep. Take your time to fully research fees, reviews and other details before applying. It’s also wise to compare multiple debt relief companies before you commit.
Credit counseling
An alternative to debt relief services that can help you take control of an out-of-control debt situation is credit counseling. Credit counseling companies are often (though not always) nonprofit organizations. In addition to debt counseling, these companies may also offer a service known as a debt management plan, or DMP.
With a DMP, you make a single payment to a credit counseling company, which then divides that payment among your creditors. The company negotiates lower interest and fees on your behalf to hopefully lower your monthly debt obligation and help you pay off your debt faster.
Keep in mind that even with nonprofit organizations, DMPs are rarely free. You may have to pay a setup fee of $30 to $50, plus a monthly fee (often $20 to $75) to the credit counseling company for managing your DMP over a three- to five-year term.
Frequently asked questions about debt consolidation loans
Will a debt consolidation loan hurt my credit score?
Applying for a debt consolidation loan may temporarily hurt your credit score, since the lender will have to do a hard credit check in order to approve you. However, if you keep up with your monthly loan payments, you should see significant improvements in your score.
Just ensure that you make on-time payments on your loan; missing payments could damage your credit.
What types of debt can I consolidate?
The most popular type of debt to consolidate is credit card debt, since it typically has some of the highest interest rates. However, you can also consolidate other types of debt, such as personal loans, payday loans and medical bills.
How much can I save with a debt consolidation loan?
If you have double-digit interest rates on your credit cards and can qualify for a personal loan under 10 percent APR, you have the potential to save hundreds of dollars in interest on your debt. To see how much you can save with a debt consolidation loan, try using a debt consolidation calculator.
