The average annual percentage rate (APR) on a debt consolidation loan is around 18.56%. To put that into perspective, the average range of interest rates charged on debt consolidation loans typically falls between 8.31% and 28.81%. The quoted rate may vary depending on the unique credit background of the borrower and the lending institution they're dealing with. A debt consolidation loan is typically an unsecured form of financing used to combine existing debt and may be used to simplify bills and reduce monthly payments.
Average Debt Consolidation Interest Rate (APR): By Credit Score
We evaluated our online marketplace of debt consolidation loan providers and compiled the range of average interest rates by credit score below. We provide the high and low range of each credit class:
|Credit Class||Average Interest Rate|
|Excellent (720 – 850)||4.52% – 20.57%|
|Good (680 – 719)||6.67% – 28.33%|
|Average or Fair (640 – 679)||7.05% – 30.32%|
|Poor (300* – 639)||15.06% – 36.00%|
*Many lenders require a minimum credit score of 580 or higher. Borrowers with scores under 600 may find it difficult to qualify for a personal loan without a cosigner or collateral; your results may vary by lender.
To calculate the average interest rates by credit category, we segregated our lender marketplace into four separate credit categories and calculated the average range of rate quotes for each. For more details on the individual lenders included in the study, read our article, which compares and contrasts debt consolidation lenders.
Average Debt Consolidation Interest Rate (APR): By Loan Term
Based on our study of publicly available rates, we found that longer-term debt consolidation loans incurred higher interest rates on average. Your interest rate will differ based on your unique credit profile, the lender you work with and the amount of funding requested.
|Loan Term||Average Interest Rate||Difference to Earlier Term|
|2 - 3 Years||5.08% - 14.17%||N/A|
|5 Years||6.47% - 13.78%||+0.50%|
|7 Years||7.37% - 14.25%||+0.68%|
Weighted average interest rates provided across separate lenders. Assumes $10,000 loan amount and 740+ credit score as of March 9, 2018. Your quoted rate may vary.
Based on our analysis, we found that choosing a longer-term loan can increase your interest rate by as much as 50 basis points (0.50%) for every extra two years. This effect may vary according to the lending policies of your specific lender. Some lenders may charge the same interest rate regardless of term and base your rate solely on your credit background.
How Are Debt Consolidation Loan Interest Rates Determined?
The average interest rate for debt consolidation loans can vary significantly depending on your credit profile. Debt consolidation loans, on average, carry a higher interest rate than other types of debt. This is due to a few factors:
- Debt consolidation loans are usually unsecured, which means that there's no collateral underlying the loan, unlike a mortgage where the underlying property secures the lender's interest in the event of a default. This makes debt consolidation loans riskier for the lender.
- Debt consolidation loans are obtained by borrowers who have significant amounts of outstanding debt. Large balances on revolving debt, like credit cards and lines of credit, will drive down your credit score, especially if you exceed 40% of your allotted revolving credit on any line.
- Debt consolidation loans are typically used to reduce interest expense on other debts. By refinancing with a debt consolidation loan, existing debts are reshuffled into another format but are not actually extinguished. The higher interest rates on debt consolidation loans reflect this reality.
Pros and Cons of Debt Consolidation
Assuming you're able to secure a lower APR than the weighted average cost of your existing debt, a debt consolidation loan can reduce your interest expenses over time. If possible, we recommend that you dedicate any monthly savings from your debt consolidation loan toward aggressively paying off your remaining debts. This will further reduce your interest expenses and leave you debt-free faster. Additionally, if you're using your debt consolidation loan to pay off revolving debt from credit cards or lines of credit, you may improve your credit score.
Debt consolidation allows you to simplify your loan payments. Instead of paying multiple creditors, you're now only dealing with one lender. This is especially helpful if you're juggling multiple due dates or interest rates on separate credit cards. Having a single creditor reduces the likelihood of an accidental missed payment, which can wreak havoc on your credit score. Transforming existing revolving credit into installment credit through a debt consolidation loan also diversifies your credit mix, which may further improve your credit standing.
Reducing monthly payments is a big reason many people choose debt consolidation loans. The minimum monthly payments on several credit cards and short-term loans can quickly add up to unmanageable figures. By consolidating your debt, not only do you simplify your monthly payments, you restructure your debts and reduce your monthly payments by stretching them over a longer period of time. This can provide borrowers with more breathing room. However, borrowers should take care not to stretch out their payment period too far, because this increases the overall interest expense on the loan, as detailed below.
Loan Consolidation Debt Trap
If you extend your loan term out too far, you may end up paying more interest than if you had avoided debt consolidation and instead focused on aggressively paying off debts in the short run. Some lenders will also charge higher interest rates for longer periods. Unless the APR you can obtain through loan consolidation is significantly lower than the weighted average of your outstanding debts, you should evaluate whether you might be able to pay off your existing debts within a shorter period of time without a debt consolidation loan.
Finally, debt consolidation loans will not address risky behavior, and they may actually exacerbate debt problems by providing the borrower with excess capacity to borrow. Due to the reduced monthly payments, many borrowers may be tempted to continue spending beyond their means. This can result in borrowers ending up even deeper in debt. Instead, borrowers should think of debt consolidation loans as a second chance to set their finances in order. Any excess cash saved from the reduced payments should be viewed as opportunities to rid themselves of their existing debt. We emphasize that new debts should be avoided altogether.
Debt Consolidation Loans: Fees and Penalties
Prepayment penalties and origination fees may also eat into the savings you obtain from a lower rate on your new debt consolidation loan. Many lenders will charge loan initiation fees of 1% – 5% of the requested loan amount, which can reduce or eliminate the savings gained from your loan consolidation.
Additionally, certain lenders may charge prepayment penalties, which penalize borrowers for attempting to pay off their loans in advance. This has the same negative impact as a hefty initiation fee. Before undertaking any kind of borrowing, be sure to have a clear understanding of all fees that the lender charges to avoid any surprises. You may find that any short-term savings from loan consolidation might be diluted or eliminated by subsequent fees.