Best Debt Consolidation Loans of April 2023

If your desk is awash with monthly bills, including high-interest credit card bills, you're not alone. In fact, a report from The Ascent shows that the average unsecured loan balance is $9,896.

One of the smartest financial moves to make is getting a debt consolidation loan.

The best debt consolidation loans let you take out a personal loan to pay off existing debt, including high-interest credit card debt. You can also use a debt consolidation loan to pay off secured debt like a boat, ATV, or auto loan. If you're a small business owner, a debt consolidation loan can pay off business debt.

A debt consolidation loan is a loan used to pay off other debt. Usually, a debt consolidation loan has a lower interest rate than other debt (like credit card debt). You can also use it to pay off multiple debts -- for example, multiple credit cards or loans. Then, you have only one debt payment to remember instead of several.

It can be easy to confuse credit card refinancing with debt consolidation, but they are two different things meant to accomplish the same goal -- to become debt free.

There are a couple of ways to refinance credit card debt. One is to transfer your credit card balance to a card with a 0% promotional rate (more on this in a moment). The other is to consolidate the debt through a personal loan.

A debt consolidation loan can save you money and time. Here are a few other benefits:

• Lower interest rate: Most debt consolidation loans have a lower interest rate than credit cards. Paying off high-interest debt with a low-interest consolidation loan can save you thousands of dollars over the life of a loan.
• Lower monthly payments: If you have a lower interest rate, you'll likely also have lower monthly payments. If you find yourself worrying about how you're going to repay credit debt or other unsecured debt, a debt consolidation loan can help you lower the total monthly payment due.
• Clear finish line: From the time a lender approves your consolidation loan, you will know precisely the repayment term and when it's due to be paid off.
• Fewer bills: Consolidating multiple debts into a personal loan means you will have fewer bills to juggle. If you're busy like most people, having one installment loan to pay can simplify your life. Rather than making sure each credit card payment is sent, writing a check for your auto loan, and double checking that all other bills are covered, you pay a single monthly payment.
• Higher credit score: You may be able to improve your credit score by making regular payments. Since your credit history plays a role in everything from renting an apartment to whether you qualify for the lowest auto insurance rates, raising your credit score makes life easier. Once you've achieved excellent credit, you will have access to the best interest rates and loan terms next time you need to borrow money.

Most financial decisions, including personal loans for debt consolidation, have pros and cons. Here are some drawbacks:

• If you use your loan to pay off your credit cards, you may be tempted to use those cards again, leaving you with a consolidation loan and new high-interest debt. New debt leads to a higher debt-to-income ratio, an issue that is factored into your credit score.
• There is often a sense of relief once you've paid off high-interest debt, which may tempt you to spend more money or spend unwisely. The entire point of a debt consolidation loan is to get you out of debt and make your life easier. Whether you take out a secured loan or an unsecured loan, stick to your budget once the loan is paid in full.
• If you take out a secured loan using collateral, such as your house or your car, to keep the interest rate low, you risk losing that collateral if you miss payments. It's never a good idea to miss payments, but if you're not sure you will make all payments as agreed, consider an unsecured loan instead.
• The wrong loan can end up costing you money in interest or fees. Make sure you understand all the costs involved and don't inadvertently put yourself in a worse situation. A high origination fee, late payment fees, and prepayment penalty will each take money out of your pocket.

Yes, you can get a debt consolidation loan if you have bad credit. Here are a few extra steps you can take to increase your chances of getting approved:

1. Check your credit reports for errors. Mistakes can drag your score down. To get started, order a free copy of your credit report from each of the three major credit bureaus. Then, read through each record carefully. If you find a mistake on your credit history, report it to the credit bureau.
2. Get prequalified with multiple lenders. Getting prequalified doesn't affect your credit score -- usually (always ask your lender to confirm, though). By getting prequalified, you can find out whether or not a lender will offer you a loan.
3. Consider secured debt or getting a cosigner. If you're having trouble getting approved for a loan, look into secured loans (loans that require collateral) or asking someone to cosign your loan. Doing one (or both) of these things can make it easier for you to get approved for a debt consolidation loan.

For more information, check out our list of best personal loans for bad credit.

The reason to look at personal loans for debt consolidation is to see if one would benefit your financial situation. Here's what you should look for:

• A competitive interest rate: Shop for the best rate you can find, although the interest rate is not the only thing that determines how much a loan will cost. You must also factor in the cost of the origination fee and repayment term. These are reflected in the loan's APR.
• Low origination fees: An origination fee is an upfront cost that lenders charge you for processing and distributing your loan. They typically range from 1% to 8%. Say you take out a loan for $10,000. That means you may pay anywhere from $100 to $800 in origination fees. The best debt consolidation loans charge little or no origination fees. If you have excellent credit, check with your lender to learn if the fee is negotiable.
• Repayment terms that work for you: Ideally, you want to find a loan with the shortest loan period you can afford. The faster you pay off your loan, the less you will pay in interest. For example, let's say you borrow $10,000 at 9% interest. If you choose to pay it off in three years, your monthly payments will be $318, and you will pay a total of $1,448 in interest. Now, if you instead choose a six-year loan, your payments will be lower at $180 per month -- but you will pay a total of $2,978 in interest, or $1,530 more.
• No prepayment penalties: Some lenders charge you a fee if you decide to pay a loan off early. Look for a lender who does not charge prepayment penalties. As a borrower, the primary purpose of a debt consolidation loan is to get you out of debt as quickly as possible.

Personal loans for debt consolidation can be a great way to meet your financial goals, but they're not the only option. Here are some alternatives to a debt consolidation loan:

Balance transfer credit cards

A balance transfer card offers an introductory rate, most often a 0% APR for a set time period (typically 12 to 21 months). You apply online, give the new credit card company a list of the balances you want to be transferred, and wait to hear back from it. Transfer fees usually range from 3% and 5% of the balance transferred. But beware: The card's interest rate will rise dramatically as soon as the intro period ends. You should plan to pay the card off in full before then.

Home equity loans

If you owe less on your home than it's worth, that means you have equity and can borrow against it. If you use a home equity loan for debt consolidation, you'll owe your mortgage lender instead of your other creditors (like credit card issuers). The interest rate might be lower on a home equity loan than you'd pay on a credit card or personal loan. The danger is that you could lose your home if you miss payments.

401(k) loans

While the best move with a 401(k) plan -- or any other retirement plan -- is to leave it alone and let it grow, some plans do allow for borrowing. You don't have to worry about your credit score when borrowing from your 401(k) because no credit check is required. A 401(k) loan generally lets you borrow 50% of your 401(k) balance or $50,000, whichever is less (with some exceptions). When you take out a 401(k) loan, you pay interest to yourself by putting your interest payments back into your retirement account. However, if you don't pay back the loan within five years, you will owe income tax and a penalty of 10%.

Yes, if consolidating means snagging a low enough interest rate to save money long term. That's money that can be put toward important goals like building an emergency account, paying off other existing debt, or investing.

The best financial options give you a way to solve today's money issues while helping you plan for the future. Properly used, personal loans for debt consolidation can do just that.