Best debt consolidation loans in August 2024
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How to choose the best debt consolidation loan lender
There are many factors to consider before choosing an individual lender. Here are some key things to keep in mind when comparing lenders.
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- Approval requirements. Lenders consider your credit score, income and debt-to-income ratio when assessing loan applications. If you have bad credit, look into lenders with more flexible approval criteria.
- Interest rates. Different lenders advertise different annual percentage rates. The lowest advertised rate is never guaranteed and your actual rate depends on your credit. Make sure to get a quote from lenders to see what interest rate you will be paying before applying.
- Fees. While some lenders do not charge any additional fees, be on the lookout for late fees, origination fees and prepayment penalties. Factor these in when calculating your monthly payment.
- Loan amounts. Make sure you know how much you need to borrow before choosing a lender, as each lender has its own loan amount range.
- Repayment options. Lenders typically offer several repayment term options. If you are taking out a larger loan, finding a lender that offers a long repayment period could help you decrease your monthly payment.
- Unique features. Some lenders offer special perks and features such as an introductory no interest period or online financial tools. For debt consolidation loans, it is a good idea to look for lenders who offer direct payments to creditors.
- Customer service. It is a good idea to look into a lender’s customer service options, including phone hours, online chat options and in-person customer service. If in-person service is important to you, make sure the lender you choose offers it before applying.
Compare debt consolidation loan lenders in August 2024
| LENDER | EST. APR | LOAN TERM | LOAN AMOUNT | BEST FOR | MIN. CREDIT SCORE |
|---|---|---|---|---|---|
| Best Egg | 8.99%-35.99% | 3-5 years | $2,000-$50,000 | High-income earners with good credit | 600 |
| Happy Money | 10.50%-29.99% | 2-5 years | $5,000-$40,000 | Consolidating credit card debt | 640 |
| LightStream | 8.49%-24.49%* (with autopay) | 2-7 years | $5,000-$100,000 | High-dollar loans and longer repayment terms | Not specified |
| PenFed | 7.74%-17.99% | Up to 5 years | $600-$50,000 | Smaller loans with a credit union | 700 |
| OneMain Financial | 18.00%-35.99% | 2-5 years | $1,500-$20,000 | Fair to poor credit | Not specified |
| Discover | 6.99%-24.99% | 3-7 years | $2,500-$35,000 | Good to excellent credit | 660 |
| Upstart | 6.70%-35.99% | 3 or 5 years | $1,000-$50,000 | Consumers with little credit history | No minimum |
Calculate what you could save by consolidating
What is debt consolidation?
Debt consolidation is a process where multiple high-interest debts — like credit cards — are rolled into a single payment. Debt consolidation simplifies your repayment structure and can make it easier to keep track of your remaining debt and may help you pay it off faster.
While there are multiple ways to consolidate your debt, borrowing a debt consolidation loan from a lender, bank or credit union is one of the most common methods.
How does debt consolidation work?
There are several ways to consolidate debt, but the general process entails taking out a new debt — in this case, a personal loan — to pay off multiple debts and streamline the repayment process. Borrowing a home equity loan or taking out a balance transfer credit card are also methods of debt consolidation.
However, a debt consolidation loan is one of the most common and easiest ways to consolidate debt. With fixed interest rates and monthly payments, it's possible to save money over the life of your loan by securing a lower rate than what you had on your previous debts.
How to get a debt consolidation loan
Here are a few steps to follow for securing a debt consolidation loan:
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- Determine how much you need to borrow. Before you choose a lender, calculate your existing debt to determine the amount you will need to borrow.
- Check your credit score. To qualify for a debt consolidation loan, you typically need a credit score of 600 or higher. Your credit score also impacts the rate you receive.
- Get prequalified. Many lenders allow you to prequalify online without committing to anything or hurting your credit score.
- Compare rates and loan terms. Before choosing a lender, carefully consider the terms of each lender. Choose the one that has the best rates and terms for your situation.
- Choose a lender and apply. Once you have decided on a lender, prepare the necessary documents and apply. Many lenders let you apply online, but you can also apply in person at a financial institution.
Pros and cons of debt consolidation loans
Before signing on the dotted line, it's important to be aware of the potential benefits and drawbacks that come with a debt consolidation loan. Here's what you need to know.
Pros
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Simplified payments: Debt consolidation turns multiple payments into one fixed monthly payment. Only having to make one payment a month — as opposed to four or five — can help encourage healthy repayment habits.
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Lower rates: Borrowers with above-average credit can qualify for lower interest rates and save money in interest over the life of the loan.
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Improve credit health: Consolidating your debts into one payment can help you grow your credit faster through simplifying the repayment process.
Cons
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Potential fees: Many loans come with fees, like prepayment and origination fees that can eat into the overall value of your loan.
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Doesn't pay down debt: While consolidation can help make your debt more manageable, it doesn't actually pay it down, and you'll still have to make the monthly payments.
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Doesn't solve overspending: If you run up revolving accounts, like credit cards, or continue to live outside your means a debt consolidation loan may only offer temporary relief.
Why consolidate your debt?
Debt consolidation has many potential benefits.
- Potentially lower interest rates: If you have several credit cards with double-digit interest rates and you qualify for a debt consolidation loan at a lower rate, you can potentially save thousands in interest and fees.
- Pay off debt sooner: Combining all the debt into one bucket can make it easier to pay the debt off sooner because you don’t have to balance separate payments.
- Simplified finances: Credit card rates are variable and your monthly payments differ depending on your balance, so it can be hard to know when your debts will be paid off. Debt consolidation puts all of your payments in one place so you can keep track of it easier.
- Set repayment schedule: A debt consolidation loan combines multiple debts into one monthly payment with a fixed rate and a set repayment term, so your monthly payments stay the same. You don’t have to worry about multiple due dates or varying payment amounts.
- Credit score improvement: Credit scoring models, like FICO and VantageScore, place a lot of weight on your credit utilization ratio. When a new consolidation loan lowers your credit utilization ratio, your credit score might climb as a result.
Generally, a debt consolidation loan is a good idea if you can pay off the new debt, you have a high credit score to get good rates and you like the stability of a fixed monthly payment.
Although a debt consolidation loan can be helpful for many people, it won't solve your financial problems on its own. To reap the full benefits and avoid further issues, you’ll need to avoid making late payments and keep balances low on your recently paid off credit card accounts.
Alternatives to a debt consolidation loan
Home equity
One popular way people pay off debt is to use the equity in their homes. Home equity loans and home equity lines of credit (HELOCs) let borrowers use their homes as collateral in exchange for financing. Just be sure to factor in the risks if you’re considering this option. The lender can seize your home if you can't make the payments.
Who this is best for: Borrowers who have built up equity in their homes.
Who this is not good for: Those unsure of their ability to maintain the monthly payments.
Home equity loan versus debt consolidation loan: Home equity loans and HELOCs may offer lower rates than debt consolidation loans, though they come with more risks, since your home is used as collateral.
Debt relief services
Debt relief services, including debt settlement companies, offer another way to deal with your debt if you can’t qualify for a consolidation loan. These companies reach out to creditors and debt collectors on your behalf and try to settle the debt for a lesser amount.
If you decide to pursue debt relief services (perhaps as an alternative to bankruptcy), 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.
Who this is best for: Borrowers who are experiencing financial hardship and cannot pay their debt.
Who this is not good for: Those with a thin credit history or less-than-stellar credit score.
Debt relief services versus debt consolidation loan: Unlike debt consolidation loans, debt relief services aim to eliminate some of your debt without you having to pay it. With that said, pursuing debt relief is a risky move, and it can damage your credit score.
Credit counseling
Another option that can help you get debt under control is credit counseling. Credit counseling companies are often (though not always) nonprofit organizations. In addition to debt counseling, these companies may 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 rates and fees on your behalf to lower your monthly debt obligation and help you pay the debts off faster.
DMPs are rarely free, though, even if they’re done by a nonprofit credit counseling service. 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.
Who this is best for: Borrowers who need help structuring their debt payments.
Who this is not good for: Those with little wiggle room in the budget.
Credit counseling versus debt consolidation loan: With a debt consolidation loan, you're in control of your payoff plan, and you can often apply with few fees. With credit counseling, a third party manages your payments while charging setup fees.
Balance transfer credit card
With a balance transfer card, you shift your 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 the balance before the introductory rate expires so that you save money on interest. When you calculate potential savings, make sure you factor in balance transfer fees.
Keep in mind that paying off existing credit card debt with a balance transfer to another credit card isn't likely to lower your credit utilization ratio like a debt consolidation loan would.
A debt consolidation loan is also going to offer higher borrowing limits, enabling you to pay off more debt, as well as fixed monthly payments, which make it easier to budget and stay disciplined with paying off debt.
Who this is best for: Borrowers who can pay off existing debt quickly.
Who this is not good for: People with a young credit history or a less-than-average score.
How Fed rate hikes affect debt consolidation loans
In an effort to combat rising inflation, the Federal Open Market Committee (FOMC) raised interest rates seven times in 2022. Most recently, the Fed hiked rates by 0.25 percent during the first Fed meeting of 2023. These rate hikes have caused interest rates on personal loans to rise.
Most personal loans have fixed rates, meaning that borrowers who already have a personal debt loan for debt consolidation do not need to worry. However, those looking to take out a new loan may face higher rates.
If you are in the market for a debt consolidation loan and want to ensure you get the best rate possible, there are some steps you can take.
- Prequalify if possible.
- Check your credit score before applying.
- Apply with a co-borrower.
- Shop around and compare rates.
FAQs about debt consolidation loans
Methodology
To select the top debt consolidation loan lenders, Bankrate reviewed 33 lenders across the personal loan space. Several factors related to consolidation were considered, including a variety of credit profiles accepted, loan amounts, terms and whether the lenders had specialized consolidation loan products or services.
Bankrate star ratings rely on 15 data points broken into three categories: availability, affordability and customer experience. Availability covers how fast you can get a loan, how much you can borrow and the income and credit requirements. Affordability includes fees, the range of interest rates offered and penalties. Lastly, customer experience is an evaluation of online applications, online account access, customer service hours and apps.
Among the top features evaluated for debt consolidation loans were the availability of online applications, flexible repayment options and customer discounts.