Best Personal Loans for Debt Consolidation of June 2020

Dana has been writing about personal finance for more than 20 years, specializing in loans, debt management, investments, and business.

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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 personal loan for debt consolidation to pay them off and simplify your life.

Each of us needs a financial plan so that we can pay our bills on time and move towards our financial goals. If you are struggling with debt, that plan should also include a debt payoff scenario. That's where consolidating your debt through a personal loan could make a difference.

We'll help you compare online lenders who offer the best personal loans for debt consolidation. Understanding what to look for will help you find the right loan for your situation.

Ratings Methodology
Lending Partner Best For Min. Credit Score Loan Amounts APR Range Next Steps

SoFi

Best For:

Low APR for borrowers with high income

Min. Credit Score:

660

Loan Amounts:

$5k - $100k

APR Range:

5.99% - 19.96% (w/AutoPay)

Check Rate

On Secure Website.

Upstart

Best For:

Reducing high interest debt

Min. Credit Score:

620

Loan Amounts:

$5k - $30k

APR Range:

6.18 - 35.99%

LendingPoint

Best For:

Borrowers with poor credit scores

Min. Credit Score:

585

Loan Amounts:

$2k - $25k

APR Range:

9.99 - 35.99%

Check Rate

On Secure Website.

FreedomPlus

Best For:

Borrowers with good to excellent credit scores

Min. Credit Score:

640

Loan Amounts:

$7.5k - $40k

APR Range:

6.99 - 29.99%

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What is a personal loan for debt consolidation?

Consolidating your debt with a personal loan involves taking out one loan and using it to pay off other debt, usually lowering the interest rate in the process. Not only does it save you money by giving you a better interest rate, but it also simplifies your bill payments.

What are the benefits of using a personal loan for debt consolidation?

We know that a debt consolidation loan can save you money and time, but here are a few of the other benefits:

  • If you find the right personal loan, you can use it to lower your interest rate and either pay down your debt faster or reduce your monthly payments.
  • You know precisely how long it will take to pay off your debt, providing you a much-needed light at the end of the tunnel.
  • Consolidating multiple debts into a personal loan means you will have fewer bills to keep track of, thus reducing the risk of late payments.
  • If you use a personal loan to consolidate high-interest credit card debt, you're likely to be rewarded with a higher credit score. You'll improve your credit utilization ratio by paying down the balance you owe on your cards, and you may also be able to improve your payment history by making regular payments.

What are the drawbacks of personal loans for debt consolidation?

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.
  • 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.
  • If you take out a 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.
  • 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.

What should I look for in a debt consolidation loan?

The entire 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. You may find that you need a high credit score to qualify for the lowest interest rates on your loan. Shop for the best rate you can find, although 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 length of the loan.
  • Low origination fees. An origination fee is an upfront cost that lenders charge you for processing and distributing your loan. They can range from 1% to 8%. Say you take out a loan for $10,000. That means that you may pay anywhere from $100 to $800 in origination fees. That's money that's taken off the top of your loan and not distributed to you.
  • 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 -- but the higher your monthly payments will be. For example, let's say you borrow $10,000 at 6% interest. If you choose to pay it off in three years, your monthly payments will be $305, and you will pay a total of $952 in interest. Now, if you instead choose a six-year loan term, your payments will be lower at $166 per month, but you will pay a total of $1,932 in interest, or $980 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.

What are the alternatives to debt consolidation loans?

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 others:

Balance transfer credit cards: A balance transfer card offers a promotional rate, such as 0% APR for a particular number of months (typically 12 to 24). 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. The credit line you are approved for, minus transfer fees charged by the new company, is the maximum amount you can transfer. Transfer fees usually range from 3% and 5% of the balance transferred. Because the card's interest rate will rise dramatically as soon as the promotional period expires, you should plan to pay it off in full before the expiration date.

Home equity loans or lines of credit: If you owe less on your home than it's worth, that means you have equity and can borrow against it. A home equity loan also allows you to transfer debt from one lender to another. And you may find that the interest rate is lower than you'd pay on a credit card or personal loan. That's because your home serves as collateral, giving lenders confidence that they're going to get paid one way or another. 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. A 401(k) loan generally allows you to borrow 50% of your 401(k) balance or $50,000, whichever is less. The only exception is when you have a balance of less than $20,000. When that's the case, you can borrow up to $10,000. On the bright side, when you take out a 401(k) loan, you pay interest to yourself. However, you also risk shortchanging your retirement, and if you don't pay back the loan within five years, you will owe income tax and a penalty of 10%. You don't have to worry about your credit score when borrowing from your 401(k) because no credit check is required.

Caveat concerning COVID-19 pandemic: Under the CARES Act, if you're experiencing financial hardship due to the novel coronavirus, you can now withdraw up to $100,000 from a 401(k), IRA, or other retirement plan without being hit by the customary 10% penalty. Although you will still have to pay ordinary income tax on the money you take out, you can spread it out over three tax years. The rule that prevented Americans from borrowing more than 50% of their 401(k) balance has also been waived during this period.

Is a personal loan for debt consolidation right for you?

The best way to learn if a personal loan for debt consolidation is right for you is by using this debt consolidation calculator. You will need to know the interest rate of the debt consolidation loan you're considering, but our partner loan companies make it easy by using a soft credit check to provide you that rate.

The best financial options provide you with 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.

Lending Partner Best For Min. Credit Score Loan Amounts APR Range Next Steps

SoFi

Best For:

Low APR for borrowers with high income

Min. Credit Score:

660

Loan Amounts:

$5k - $100k

APR Range:

5.99% - 19.96% (w/AutoPay)

Check Rate

On Secure Website.

Upstart

Best For:

Reducing high interest debt

Min. Credit Score:

620

Loan Amounts:

$5k - $30k

APR Range:

6.18 - 35.99%

LendingPoint

Best For:

Borrowers with poor credit scores

Min. Credit Score:

585

Loan Amounts:

$2k - $25k

APR Range:

9.99 - 35.99%

Check Rate

On Secure Website.

FreedomPlus

Best For:

Borrowers with good to excellent credit scores

Min. Credit Score:

640

Loan Amounts:

$7.5k - $40k

APR Range:

6.99 - 29.99%

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