How do I choose the best debt consolidation lender?

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

If you’re 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.

7 factors to help you compare debt consolidation loans

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

1. Approval requirements

As with all financial products, your credit score is one of the most important factors when determining if you qualify. When choosing between different debt consolidation options, pay attention to credit score requirements along with the debt-to-income ratio requirement set by the lender.

Both of these factors will allow you to select lenders that work with borrowers within the same credit profile as yours. This could help you get a better rate, even if you have less-than-perfect credit.

2. Interest rates

When shopping around, you will see that the APR you are offered varies from one lender to the next. However, even if a lender does have a low starting rate, it will be reserved for those with excellent credit. Instead, check the maximum 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 what you’re eligible for without damaging your credit.

3. Fees

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 10 percent of the amount you request as an origination fee, and it will be subtracted from your final loan amount.

4. Loan amounts

Ahead of choosing a debt consolidation lender, you must first determine how much debt you have to 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 of your debts you want to consolidate, you can begin to look for a new lender.

Each lender has its own restrictions when it comes to the amount you can borrow. Make sure to check this beforehand so you’re able to consolidate all of your accounts without any issues.

5. 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 chose to keep 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 keep the total amount you pay low — as long as you can still make the monthly payments.

6. Unique features

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

One to look out for when comparing debt consolidation loans is the option for 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.

7. Customer service

If navigating technology isn’t your strong suit, then working with a lender that offers brick-and-mortar support is your best bet. Borrowers that prefer the convenience of online support should look for lenders that boast virtual assistance options.

Types of debt consolidation loans

Selecting the best option for your needs is important as it will help guide the type of lender you choose. Not all lenders offer the same borrowing options. Once you’ve decided on a consolidation method, you can analyze each lender’s interest rates, loan terms and fees to determine which offers make the most sense financially to achieve your goals.

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  Personal loans

  Many lenders offer debt consolidation loans, which are a type of personal loan designed to help you pay off debt faster and save on interest. Debt consolidation loans generally come with a fixed interest rate and a one- to seven-year loan term.
  
  You can use the funds for almost any purpose, but the idea is to pay off your outstanding debt with the loan and then make a single payment each month.
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  0% APR credit cards

  Also known as balance transfer credit cards, these can help you save a sizable amount in interest and eliminate high-interest debt balances sooner. They are generally reserved for consumers with good or excellent credit, and you should only consider this option if you can pay off the new card during the introductory period.
  
  Otherwise, you’ll likely pay a very high interest rate — the average credit card rate is nearly 21 percent, according to Bankrate data.
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  Home equity loans

  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 and comes with a repayment period of five to 30 years.
  
  The interest rate is also fixed and lower than most credit cards, but the major drawback is that your home acts as collateral. As a result, you could lose your property to foreclosure if you fall behind on the loan payments.
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  Home equity lines of credit (HELOCs)

  A HELOC is like a home equity loan — but you won’t receive the loan proceeds in a lump sum. Instead, you’ll get access to a pool of cash that you can pull from as needed 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 up to 20 years. The monthly payment amount may fluctuate since the interest rate for a HELOC is typically variable.

Pros and cons of debt consolidation loans

Debt consolidation can help you get out of debt faster and save money through lower interest rates. It’s particularly advantageous for those with multiple high-interest debts like credit cards because it streamlines the payoff process.

Pros

• Lower interest rates: You may be able to get a lower average interest rate on a debt consolidation loan.
• Improved cash flow: Depending on your loan terms, you could be able to lower the total amount you pay each month.
• Simplified repayment: Debt consolidation allows you to consolidate several debts into one, which can make it easier to stick to a debt payoff plan.
• Higher credit score: A debt consolidation loan can help you raise your credit by improving your payment history and boosting your credit utilization ratio.

Cons

• Origination fees: Some lenders charge fees to open the account. They could be between 1 and 10 percent of your loan amount.
• Balance transfer fees: If you’re using a credit card to pay off debt, you’ll likely have to pay a balance transfer fee, similar to an origination fee. This is usually a percentage of whatever you transfer to the card.
• New debt: If you don’t make changes to your spending habits, you could easily fall back into the same bad habits that led you to accumulate debt in the first place.

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 around 11.5 percent. That said, interest rates on debt consolidation loans range from about 5 percent to 36 percent.

Your credit score, debts and monthly income can influence the interest rate and terms of the loan. A credit score between 720 and 850 is typically required to qualify for the lowest interest rate. Lenders will also consider factors like your age, citizenship status, involvement in bankruptcy or foreclosure proceedings, DTI ratio and income.

But if you have less-than-stellar credit, you could 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, defaulting on your loan could result in the lender seizing your collateral to recoup its investment.

Next steps

Before you apply for a loan or credit card to consolidate your debt, weigh your options to decide which type of debt consolidation 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, meet your debt payoff goals faster and save money.