Debt consolidation allows you to combine multiple debts into just one, often at a lower interest rate and lower monthly payment.
If you’re considering debt consolidation, saving money on interest is probably a top priority for you. Make sure to shop around to find the best interest rate while also taking into account other factors like fees, repayment terms, and more.
Compare debt consolidation loan rates
Current debt consolidation loan rates
Debt consolidation is usually done through a personal loan, which most often has a fixed interest rate. You’ll be offered a specific rate at the time of loan approval and will pay that rate for your entire term.
Because of these fixed rates, your monthly payments will also remain consistent for the full term. Here’s what you can expect based on current rates:
Average prequalified personal loan rates for borrowers who used the Credible marketplace to select a lender for debt consolidation. Prequalified rates are not offers of credit. Source: Credible.com analysis.
The rate you’ll be offered on your debt consolidation loan depends on several factors:
- Lender: Interest rates vary from one lender to the next. Many lenders share their ranges on their websites so you can see them before applying. While each lender has a range rather than a set rate, different lenders may have lower starting rates or higher maximum rates than others.
- Credit score: Your credit score is one of the most important factors lenders consider. The higher your credit score, the lower the rate you can get. Likewise, a lower credit score will result in a higher rate. Before you apply for a loan, make sure to check your credit score so you’re prepared.
- Debt-to-income ratio (DTI): You may be offered a lower rate if you have a lower DTI , meaning your debt takes up a relatively small percentage of your income. Too high of a DTI could result in you getting a higher rate — or even being denied a loan altogether.
- Loan amount: The amount you borrow may also partially affect your loan interest rate. If you borrow a large sum of money, you may be subject to a higher rate. However, you may also get a higher rate for a very small loan.
- Repayment term: Generally speaking, a longer repayment term results in a higher rate, while a shorter repayment term results in a lower one. In addition to the higher rate, a longer repayment term costs you more in interest either way, since there’s more months for interest to accrue.
“In addition to interest rate, you should also pay attention to a lender’s annual percentage rate (APR). The APR on a loan is the total cost of the loan, including both interest and fees. It gives you a more realistic view of how much your loan will cost.” — Charlie Tarver, Editor, Personal Loans
Learn More: APR vs. Interest Rate on Personal Loans
How does a debt consolidation loan work?
A debt consolidation loan is most often a personal loan. It’s an installment loan that you borrow in one large lump sum and then pay off over a predetermined repayment period.
When you borrow a debt consolidation loan, you pay off other debts, such as high-interest credit card debt or even other personal loans. You no longer have to make several separate payments in different amounts and at different interest rates.
Instead, you’ll just have one monthly payment. And because personal loans usually have lower interest rates than credit cards, you’re often able to reduce the cost of all of your debt.
For example: Let’s say you have three separate debts you’d like to consolidate, which add up to $8,250. Your debts are:
- A credit card with $2,500 and an interest rate of 19%
- A credit card with $750 and an interest rate of 21%
- A 36-month personal loan with $5,000 and an interest rate of 12%
You have monthly payments that amount to more than $250. Assuming you make the minimum payment on your credit cards and pay off your personal loan on time. It will take you more than 17 years to pay off all of your debt, and you will pay more than $5,000 in interest.
Now, let’s say you apply for a debt consolidation loan to pay off all three debts. Your credit has improved since you last got a personal loan, so you qualify for an interest rate of 9% on a five-year loan.
Your new monthly payment would be just $171, you would pay only $2,025 in interest — less than half of what you originally would have paid — and your debt would be paid off more than a decade sooner.
Pros and cons of debt consolidation
Before pursuing debt consolidation, consider some of the pros and cons:
Pros
- Simplified payments: Debt consolidation allows you to combine multiple monthly payments into one, which can simplify your monthly budget.
- Lower interest rate: In many cases, you can qualify for a lower interest rate, especially if you’re consolidating high-interest debt.
- Lower monthly payment: A lower interest rate and fewer payments could allow you to pay less on your debt each month, freeing up money for extra payments or other goals.
- Faster repayment: With a lower interest rate, you’re likely to pay off your debt faster, especially if you consolidate credit cards, which have compounding interest, into a personal loan, which has simple interest.
Cons
- Upfront costs: Debt consolidation loans often come with upfront costs, such as origination fees that can range from 1% to 12% of your loan amount. However, some lenders may not charge origination fees.
- Interest rate risk: While many people end up with a lower interest rate after debt consolidation, your rate could increase if you have fair or poor credit.
- Potential credit impact: Debt consolidation can have a short-term negative impact on your credit score because you’re adding new debt to your credit report. However, the long-term impact may be a positive one.
- May not address root causes: If you have problems managing your finances that contributed to your debt, consolidation won’t necessarily help address them.
Read More: Pros and Cons of Debt Consolidation
Additional strategies to get out of debt
If you’re struggling to pay off debt, debt consolidation isn’t your only option. Here are some alternatives to consider:
- 0% balance transfer card: If you have credit card debt, consider getting a 0% APR balance transfer card, which can allow you to avoid interest between 15 to 18 months. This type of strategy is ideal if you’re planning to put more toward your debt beyond the minimum payment in order to pay it down faster without interest accruing. As long as you pay off your debt within that time, you’ll pay no interest at all.
- Debt snowball or avalanche: These debt repayment strategies provide a framework to help you approach your debt. The snowball method pays off your smallest debts first, while the avalanche method pays off the debt with the highest interest first. The snowball method is generally the most motivating, as you see progress toward paying down your debt, but the avalanche method saves you the most in overall interest.
- Negotiate with your lender: If your debt has become overwhelming, consider contacting your lender to see if an agreement can be made. You can do this yourself, though many people negotiate their debts down using debt settlement. However, this should be a last resort, as debt settlement could hurt your credit and leave you open to legal action by your creditors.
- Increase your income: The more money you have to spend in your budget, the more quickly you can pay down your debt. It’s not uncommon for people to pick up side hustles to help pay off debt, but you can also try to increase your income at your current job.
- Credit counseling: A credit counselor can look at your financial situation and advise you on how best to get out of debt. They can also help you establish a debt management plan, which can help reduce your interest rates or fees and make your debt more manageable.
Debt Consolidation FAQ
Will debt consolidation affect my credit score?
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Can I consolidate all types of debt?
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Can I still use my credit cards after consolidating my debt?
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