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If your desk is littered with monthly bills, including high-interest credit card bills, you may be able to use a debt consolidation loan to pay them off and simplify your life.
This can be one of the smartest financial moves you make. Here's why: 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.
Whether you have bad credit, average credit, or excellent credit, there's a debt consolidation loan for you. Below, we'll help you compare online lenders who offer the best personal loans for debt consolidation.
The Ascent's Best Debt Consolidation Loans
- Low APR for borrowers with high income: SoFi
- Reducing high interest debt: Upstart
- Borrowers with poor credit scores: LendingPoint
- Diverse offerings: FreedomPlus
- Debt consolidation: Discover Personal Loan
- Debt consolidation and fair credit: Upgrade
What is a debt consolidation loan?
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.
COVID-19 debt consolidation loans
Many people are choosing to consolidate debt during the coronavirus pandemic. Here's why:
- Lower your monthly payment: Many debt consolidation loans have a lower monthly payment than credit cards.
- Save money on interest: You can save yourself hundreds of dollars in interest fees (depending on the size of your debt) by getting a debt consolidation loan. This is because loans generally have lower interest rates than credit cards.
- Peace of mind: You won't have to wonder when your debt will be paid off -- you'll know. If you get a 5-year loan, your debt will be paid off in five years.
Whether you're trying to save money during the pandemic, or you'd simply like a structured timeline for paying off debt, a COVID-19 debt consolidation loan may be the right choice for you.
Get started: Apply for one (or several) of our experts' recommended debt consolidation loans listed above.
What are the benefits of using a personal loan for debt consolidation?
A debt consolidation loan can save you money and time. Here are three other main benefits:
- Save money. Most debt consolidation loans have a lower interest rate than credit cards. Many people can save hundreds or thousands of dollars with a lower interest rate. Plus, if you have a lower interest rate, you'll likely also have a lower monthly payment.
- Simplify debt payments. Consolidating multiple debts into a personal loan means you'll have fewer bills to juggle. Also, you'll know exactly how long it will take to pay off your debt -- for example, if you get a five-year loan, you'll pay off your debt in five years.
- Improve credit score. One of the best ways to improve your credit score is by paying off debt.
What are the drawbacks of debt consolidation loans?
Most financial decisions, including personal loans for debt consolidation, have pros and cons. Here are some drawbacks of personal loans for debt consolidation.
Temptation to go into more credit card debt. 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 credit card debt.
Not reading the fine print. 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.
There's also a unique risk with one type of loan: a secured loan. If you take out a secured loan, you'll need to put up collateral, such as your house or your car. You risk losing that collateral if you miss payments. An unsecured loan won't require collateral. To avoid the risk of losing your home or your car, consider unsecured debt consolidation loans first.
Can I get a debt consolidation loan with bad credit?
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:
- 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.
- Get pre-qualified with multiple lenders. Getting pre-qualified doesn't affect your credit score (usually -- always ask your lender to confirm, though). By getting pre-qualified, you can find out whether or not a lender will offer you a loan.
- 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.
TIP
Budgeting for loan payments
If you're getting ready to apply for a debt consolidation loan, start by outlining your current monthly expenses and income. Then, estimate how much you can put toward a loan payment each month. (Remember, the loan payment will replace some of your other debt payments.) That way, you'll know ahead of time what size loan payment is best for you -- and you can confidently work toward paying off that debt.
What should I look for in a debt consolidation loan?
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 and APR
To start, look for a good loan interest rate. Ideally, this should be below the interest rate of your existing debt.
But the interest rate is not the only cost you'll pay: There are other fees associated with loans. Also, the repayment term can affect how much interest you pay even more than the interest rate itself. To get a better picture of how much one loan costs compared to other loans, look at the loans' annual percentage rates (APRs).
A repayment term that works for you
The faster you pay off your loan, the more money you'll save in interest fees. But a short loan term (the amount of time you have to pay off the loan) also means high monthly payments. If you don't have much room in your budget, a longer repayment term might work better for you. Check our guide to the pros and cons of longer repayment terms for more information.
Low or no fees
An origination fee is an upfront cost that lenders charge you for processing and distributing your loan. These can 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. You can also check with your lender to learn if the fee is negotiable.
Also, 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. That way, you can pay the loan off faster if you want to.
What are the alternatives to personal loans for debt consolidation?
Personal loans for debt consolidation can be a great way to meet your financial goals, but they're not the only option for paying off debt. Here are some alternatives to a debt consolidation loan:
Balance transfer credit cards
A balance transfer card offers a promotional rate, such as 0% APR for a set time period (typically 12 to 24 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 them. 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 promotional period expires. 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 cards). 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%.
Is a debt consolidation loan right for you?
Yes, if consolidating means snagging a lower enough interest rate to save money. It's a great way to pay off existing debt.
If you find yourself worrying about how you're going to repay credit debt, a debt consolidation loan can help. 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. 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. And if you're a small business owner, a debt consolidation loan can pay off business debt.
The best financial options give you a way to solve today's money issues while helping you plan for the future. Properly used, a personal loan for debt consolidation can do just that.
| Lending Partner | Min. Credit Score | Loan Amounts | APR Range | Best For |
|---|---|---|---|---|
| SoFi | 680 | $5k - $100k | *Fixed: 5.99% to 20.69% APR (with AutoPay) | Low APR for borrowers with high income |
| Upstart | 580 | $1K - $50K | 7.98% - 35.99% | Reducing high interest debt |
| LendingPoint | 585 | $2k - $25k | 9.99 - 35.99% | Borrowers with poor credit scores |
| FreedomPlus | 640 | $7.5k - $40k | 7.99% - 29.99% | Diverse offerings |
| Discover Personal Loan | 660 | $2.5k-$35k | 6.99%-24.99% | Debt consolidation |
| Upgrade | 620 | $1k - $35k | 7.99%-35.97% | Debt consolidation and fair credit |
About the Author
Dana has been writing about personal finance for more than 20 years, specializing in loans, debt management, investments, and business. Her work has appeared on San Jose Mercury News, The Detroit News, Oakland Tribune, and Dun & Bradstreet. After moving around the globe, she's thrilled to be living in her hometown of Kansas City.
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*Personal Loan Disclaimer
Fixed rates from 5.99% APR to 18.28% APR (with AutoPay). SoFi rate ranges are current as of October 5, 2020 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, income, and other factors. See APR examples and terms. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
