Debt Consolidation Loan Rates Vary by Credit Score, Loan Term

Debt Consolidation Loan Rates Vary by Credit Score, Loan Term

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The average annual percentage rate (APR) on a debt consolidation loan is about 22.59%.

The debt consolidation loan rate that’s quoted 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.

Even if you score the debt consolidation loan interest rate you desire, there are pros and cons regarding debt consolidation, which we’ll review in the FAQs below.

Debt consolidation rates among top lenders

The best debt consolidation loan is typically the option carrying the lowest APR. To nab a rate on the lower end of lenders’ advertised ranges, however, your credit score will be put under the microscope.

Lender
Debt consolidation APRs
Great for borrowers with ...
FreedomPlus7.99% - 29.99%Excellent credit (720 to 850)
LendingClub8.05% - 35.89%Good credit (680 to 719)
Payoff5.99% - 24.99%Fair credit (650 to 679)
Avant9.95% - 35.99%Poor credit (600 to 649)
OneMain Financial18.00% - 35.99%Bad credit (below 600)
*Annual percentage rate ranges were accurate as of May 25, 2021.*

With that said, your debt consolidation loan rate is just one factor to consider among many. As you shop around for the right product, ensure that the loan term, fee structure and other details also fit what you’re seeking.

Average debt consolidation interest rate (APR): By credit score

There are many lenders to choose from when you’re comparing debt consolidation loan interest rates, but each lender will zero in on your credit score when quoting you an APR.

If you know your approximate credit score, here’s a ballpark estimate of what debt consolidation loan rate you could expect.

Credit score
Average APR for 2-to-5-year loans
720 or above15.85%
680 to 71921.37%
660-67924.45%
640-65926.31%
620-63928.19%
580-61930.66%
560-57935.02%
560 or below35.13%
Data courtesy of LendingTree: 272,872 anonymized credit applications for debt consolidation personal loans over the year previous to May 25, 2021. Your quoted rate may vary.

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.

Average debt consolidation interest rate (APR): By loan term

Publicly available debt consolidation loan interest rates can give you a vague idea of what to expect from lenders. Keep in mind, however, that your selected loan term is likely to affect your quoted APR.

Your loan term is the amount of time that you agree to take to complete repayment. Most loans span three to five years, though some lenders offer shorter and longer term options.

Average APR by credit score and loan term

2 Years
3 Years
4 Years
5 Years
720 or above17.08%15.69%13.35%16.66%
680 to 71922.97%21.49%20.50%21.11%
660-67926.94%24.65%24.68%23.72%
640-65930.23%26.53%26.55%25.24%
620-63935.59%28.15%29.44%26.73%
580-61949.10%30.28%33.04%27.83%
560-57986.98%32.45%36.86%28.53%
560 or below97.92%32.92%34.61%29.01%
Data courtesy of LendingTree: 272,872 anonymized credit applications for debt consolidation personal loans over the year previous to May 25, 2021. Your quoted rate may vary.

Based on our analysis, increasing or decreasing your loan term can significantly impact debt consolidation loan rates. This effect may vary according to the lending policies of your specific lender.

You should also be aware that some lenders may charge the same interest rate regardless of term, and base your rate solely on your credit background.

FAQs: Debt consolidation loan interest rates

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 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.

What are the pros 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. Plus, 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 as well 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 — this increases the overall interest expense on the loan, as detailed below.

What are the cons of debt consolidation?

If you extend your loan term out too far, you may end up paying more interest than if you had avoided debt consolidation and focused instead 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.

What are the fees and penalties of debt consolidation loans?

Prepayment penalties and origination fees may also eat into the savings you obtain from a lower debt consolidation loan interest rate. Many lenders will charge loan initiation fees of 1% to 5% of the requested loan amount, which can reduce or eliminate the savings gained from your loan consolidation.

In addition, 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 of the fees 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.

Andrew Pentis contributed to this report.