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Debt Consolidation Loan Overview: How Does It Work?
Staying on top of multiple payments or paying high interest rates on loans or credit cards but less on other loan products can be costly and time consuming. In these instances, debt consolidation can help you combine all your debt into one loan with a single rate and loan term. It is commonly used to consolidate credit card debt, as personal loans tend to have lower interest rates and allow you time to pay off the loan.
However, these loans can also cost more as your debt consolidation loan interest rate will depend on your current loan and credit card rates and your credit score. Before deciding on a loan, you should use a debt consolidation calculator to see how much you're paying now and compare it to the quotes you received from lenders.
If used correctly, debt consolidation can lower your interest rate, improve your credit score, make your loan bills easier to manage or a combination of these options. Only use a debt consolidation loan if your rate is the same or lower than you are paying currently. If it's the same, consolidating should at least improve managing your payments. Below, we've highlighted our top debt consolidation lender picks for all credit score levels.
Best Debt Consolidation Loans for Good Credit (680 to 850)
Having good credit can make it much easier to qualify for a loan. To help narrow down your options, we found some of the best debt consolidation loan companies for borrowers with excellent credit—a 720+ FICO score—and those with good credit—a 680 to 719 FICO score.
Best for Excellent Credit (720 to 850): FreedomPlus
For borrowers with excellent credit, FreedomPlus has some of the lowest rates we’ve seen on an unsecured personal loan, which can be used for debt consolidation. If you have a credit score of 720 or higher, you may be able to score an annual percentage rate (APR) as low as 5.99%, provided you qualify for at least two rate discounts. The rate discounts are given when you add a co-borrower who has sufficient income to support loan repayment, you use at least 50% of the loan to directly pay off creditors or you have at least $40,000 in retirement savings. FreedomPlus rewards borrowers for using the loan to directly pay off creditors, making it an attractive choice for debt consolidation.
Drawbacks: The smallest amount you can borrow is $7,500. If you need less, we recommend considering SoFi or LightStream. Both of these debt consolidation lenders also look for borrowers with strong credit and offer low rates. FreedomPlus requires each applicant to have a phone call with the company to verify information in the application. For some applicants, this may be inconvenient. Loans are not available to residents of all states and some states have restrictions on loan amounts.
Best for Good Credit (680 to 719): LendingClub
What we like about LendingClub for debt consolidation purposes is that the company is available in almost every state—with the exception of Iowa—and offers a wide range of rates and terms. You may be able to pay off your creditors directly when you get a loan through LendingClub. For borrowers who are otherwise tempted to use the loan funds for other purposes, this may be helpful. To qualify, applicants should have a relatively low debt-to-income ratio—under 31%—in addition to a good credit score. While borrowers will need a credit score of 600 or higher to qualify with LendingClub, the average borrower has a credit score of 700. Borrowers also typically have several years of credit history and relatively high annual income—$70,000 or more.
Drawbacks: Because LendingClub operates through a marketplace, you’ll need to wait while investors fund your loan offer. On average, this is six days or sooner, so this company is not ideal for borrowers who want to consolidate their loans quickly. For borrowers looking for fast funding, we recommend Discover Personal Loans or Marcus, both of which can provide funds within a few days and have similar rates, terms and credit criteria as LendingClub.
Best for Fair Credit (650 to 679): Payoff
Payoff is great for credit card consolidation, as it was made specifically for paying off credit cards. We like that Payoff provides a personalized experience—scheduling regular phone calls and check-ins with company representatives—to keep you focused on reaching your debt reduction goals. The company will also work with you to modify your loan payments if you happen to lose your job. In order to qualify for a loan from Payoff, you’ll need a FICO score of 640 or higher and a debt-to-income ratio of 50% or less. You’ll need to have had credit history for at least three years, with two open and current trades, and no more than one installment loan within the past year. You cannot have any current delinquencies and no delinquencies greater than 90 days in the past year.
Drawbacks: This loan is specifically designed to pay off credit card debt, which is the most common kind of debt that consumers consolidate. However, this is not an option if you have other forms of debt you need to consolidate. If that's the case, we recommend borrowers consider Upstart or Upgrade instead. Payoff is not available to residents in Massachusetts, Mississippi, Nebraska, Nevada and West Virginia.
Best Debt Consolidation Loans for Bad Credit (Under 650)
Qualifying for a debt consolidation loan is more difficult if you have a credit score under 650. We offer a few options below for applicants with sub-650 credit scores.
Best for Poor Credit (600 to 649): Avant
While Avant doesn’t advertise its credit score minimums, the lender states on its website that most of its borrowers have FICO credit scores between 600 and 700. This makes it a debt consolidation option—and one of the only reasonable options—for borrowers with credit scores between 600 and 649. One thing that we like about this lender is its late fee forgiveness program, which incentivizes borrowers to stay on track with their payments. If you make three consecutive on-time payments after making a late payment, Avant will refund its $25 late fee. The lender also offers flexibility in how you repay your loan, as there are no fees for certain payment methods. You can repay by personal or cashier’s check, debit card, bank account withdrawal or money order without incurring any fees.
Drawbacks: Generally speaking, we recommend borrowers have a credit score of at least 580 to consider Avant. If you have a lower score, you should consider alternative options, such as the ones listed below. While Avant is available in most states, the company cannot lend to individuals in Iowa, Colorado or West Virginia.
Best for Bad Credit (Under 600): OneMain Financial
While OneMain Financial doesn’t have the most competitive rates for debt consolidation, it’s one of the few companies that will lend to borrowers with credit scores below 620. It offers significantly better rates and terms than any payday or no credit check lender—loans from these lenders can carry APRs in excess of 200%. The company provides a number of incentives through its rewards program to help borrowers stay on track with their loan. For instance, you can earn rewards for enrolling in direct pay, making on-time payments, watching financial education videos and opting for paperless statements. These rewards can be redeemed for gift cards at major retailers—such as Amazon, Target or Kmart—as well as discounts on goods, services and travel.
Drawbacks: You will need to make a branch visit to complete your loan application, which may be difficult for some borrowers. While there are over 1,600 branch locations across 44 states, there are no locations in Alaska, Arkansas, Connecticut, Massachusetts, Rhode Island or Vermont. If you want a completely online experience, we recommend OneMain Financial’s online lending arm, iLoan, which offers similar rates and terms. However, iLoan is available in fewer states than OneMain Financial.
Summary of Our Top Picks
For quick comparison, we summarize the best debt consolidation companies, according to credit score. We evaluated each company on a specific set of criteria, as explained in our methodology section below.
|Best for…||Company||APRs||Loan Amounts|
|Excellent credit (720 to 850)||FreedomPlus||5.99% - 29.99%||$7,500 - $40,000|
|Good credit (680 to 719)||LendingClub||6.95% - 35.89%||$1,000 - $40,000|
|Fair credit (650 to 679)||Payoff||5.99% - 24.99%||$5,000 - $35,000|
|Poor credit (600 to 649)||Avant||9.95% - 35.99%||$2,000 - $35,000|
|Bad credit (under 600)||OneMain Financial||16.05% - 35.99%||$1,500 - $30,000|
We evaluated over 50 different personal loan companies to find the best debt consolidation loans. In our review, we considered the following criteria:
- Competitive APRs: In most states, the maximum allowed APR for a personal loan is 36%. We looked at companies that offered rates equal to or less than this, regardless of whether the borrowers had good or bad credit.
- Range of loan amount and terms: A majority of the companies on this list let individuals borrow at least $25,000, with multiple options for repayment terms. Typically, loans are offered in repayment terms of two to seven years.
- Fair fees: Many companies in this category, such as Marcus and LightStream, do not charge any fees. Of the companies that do, the fees were reasonable, with origination fees of no more than 6% and late fees of no more than $25 or 5% of the monthly past due.
- Transparent rate and fee disclosure: Reputable companies will present rates, fees and loan amounts upfront, instead of requiring you to apply to figure out what the cost of the loan will be. Companies included in this list had transparent and easy-to-find rate and fee schedules on their websites.
- Company credibility: We evaluated the credibility of the companies on this list based on user reviews, Better Business Bureau (BBB) ratings and the company itself. Some of the companies on this list are backed by well-known financial institutions—e.g., LightStream by SunTrust, Marcus by Goldman Sachs. All companies on this list had positive user reviews and/or BBB ratings.
- Geographic reach: Most of the companies on this list are available in at least 40 states across the U.S., making them easier to recommend to a wide audience.
How to Get a Debt Consolidation Loan
If you're looking to consolidate debt, it's best to shop around and consider a variety of options, which include personal loans, balance transfer credit cards and credit card hardship programs. If you have a good credit score, you can save significantly on interest by using a balance transfer credit card with a 0% introductory APR. However, if you decide to go with a personal loan, make sure to compare at least three to four companies.
The best place to start is a bank or credit union, especially if you already have a banking relationship there. Many banks and credit unions offer unsecured and secured personal loans to individuals who have a checking or savings account with them. For instance, Wells Fargo, Citibank, U.S. Bank and Navy Federal Credit Union all offer personal loans, with some making large loans up to $100,000.
Consider Online Lending Companies
Consider online lending companies, as many can offer Average Debt Consolidation Loan Interest Rates than what you may find at a bank, and there are no account requirements. Look for APRs that are less than 36%, which is generally the allowed maximum APR that can be charged on a personal loan—though this varies by state. If you see a consolidation loan offer with a higher APR, it's likely a no credit check loan, payday loan or some other type of predatory loan. You should avoid these types of loans, as they can easily exacerbate your debt situation with their high interest rates—sometimes up to 900%—hidden fees and/or short payback times.
When applying, consider where you'll most likely qualify. If you have a below average credit score or are a low-income earner, look for debt consolidation companies that cater to borrowers like you or consider putting up collateral to secure a lower interest rate.
If you have a loan offer, evaluate the total cost of the loan, the monthly payment, the length of the consolidation loan, fees and rates, and payment methods to ensure that you’re getting a good deal. Before you sign the loan contract, know what the APR is and understand how it translates to the amount you pay per month, as well as how much you will pay back in total. Consider if there are any fees associated with the loan—such as prepayment penalties, origination fees, check processing fees or late fees.
Will Debt Consolidation Hurt My Credit Score?
Most individuals use a debt consolidation loan to consolidate credit card debt. Because you’re transferring your debt from a line of credit to an installment loan, you can actually lower your credit utilization, which can help your credit score—provided you don’t add more charges to your credit cards. An installment loan is factored into your credit score differently than a credit card, so it has no bearing on your credit utilization. If you make on-time payments on your consolidation loan, this can also be a boon for your credit score, since payment history is the biggest factor in determining your credit score.
Make a Plan to Get Rid of Debt
You need a plan to get yourself out of debt and change your financial habits. A personal loan is merely consolidating your debt, not getting rid of it, and it's easy to think that your personal loan has taken care of your debt when it hasn't. Don’t start excessively using your credit card because you’ll likely end up back in debt. Since you only make one monthly payment with a debt consolidation loan, it's easier for you to budget each month. Set enough money aside to pay your loan in full each month on top of money to save or invest.
Consider Alternative Options
Getting a debt consolidation loan is not the right move for everyone. If you’ve had a long-term issue with managing your debt, look into credit counseling programs. We generally advise individuals to avoid debt settlement programs. Beware of debt relief companies contacting you for seemingly simple ways to get out of debt.
Credit counselors help you create a monthly budget so you can tackle your debt. Look for a nonprofit organization that specializes in credit counseling. As part of the process, a credit counselor may recommend a debt management plan. In a debt management plan, your credit counselor will negotiate with your creditors to reduce interest or waive fees on your debt. You will make payments each month to your counselor, who will then disburse the payments among your creditors. Most debt management plans last three to five years.
Debt settlement companies will negotiate with creditors on your behalf to lower the amount you owe. However, we recommend individuals negotiate with their creditors directly to avoid fees or hits to your credit score that using such a company can bring. Be aware that many debt settlement companies are outright scams.