Even just one outstanding debt is a headache that can drag down your credit rating and make it tough to get a loan for a home or a car. Having several outstanding loans is even worse, as it can be difficult to keep track of payments and due dates, which makes it easier to miss a payment and thus damage your score even further. Also, the multiple interest rates can quickly escalate.
If you owe multiple outstanding debts, it might be time to consider looking into a debt consolidation loan.
“Debt consolidation essentially means combining and downsizing debts so they are easier to repay. It just means getting all debts ‘under one roof’ and at a good interest rate,” says Joseph Toms, president and CEO of Freedom FinancialAsset Management. “For someone with credit card accounts bearing high interest rates, a debt consolidation loan allows them to take out one new loan that has a lower interest rate than their credit cards, and use the proceeds to pay off all the high-interest accounts, and then have just one payment a month with the new debt consolidation loan.”
The Most Important Factors For Debt Consolidation Loans
One potential benefit of a debt consolidation loan is that you may be able to get a workable interest rate that makes it easier to pay off what you owe. But it’s not necessarily guaranteed that you will get such a rate, though the convenience of having all your payments in one place can be attractive nonetheless.
“Whereas rates on credit cards can be 13-25%, average rates on personal loans are 14-18%,” says Toms. “They can vary widely, however, from just over 4% annually (for people with exceptional credit) to 25% for people with poor credit.”
Even if your debts have already lowered your credit rating, or it wasn’t that high to begin with, you still have options. A co-borrower with a solid credit history might be able to help secure you a good rate.
Other factors to consider include:
Fees: Some lenders will charge what is called an Origination Fee, usually as a percentage of the amount owed, often around 1% to 5%. Make sure this is mentioned upfront, as “good lenders will be direct about fees,” Toms notes.
Payment Schedules: “Most personal loans have terms of 36-60 months with strict payment schedules. That means you can’t fall into the trip of making minimum payments for years on end; there is a set timeframe in which the debt must be eliminated. However, missing a payment or being late with a payment will be reflected in credit profiles, so it is important to be sure you will be able to make the payment every month before applying.”
Interest Rates: If you take out a longer-term loan, you will be able to make smaller payments, but the interest rates on the loan will add up and make it a more expensive option in the long run. Whereas a shorter loan term will mean bigger monthly payments, but less overall interest in the end. That might not be a bad thing, just figure out what works for your schedule and monthly budget.
“When deciding which loan to choose, you should understand what options you have and what works best for your particular situation. It is also essential to understand how much interest you would be paying on your loan compared to what you’re paying now,” says Todd Nelson, Senior Vice President of LightStream. “We recommend a fixed-rate that allows the flexibility for when and how you repay the debt. It’s important to make a plan for how much you will pay back at a time and how long it will take to pay it all off.”
Prepayment Penalties: If you have a sudden windfall, it might make sense for you to pay your debt early. But because lenders make their money from interest rates, some institutions will charge what is called a prepayment penalty if you pay everything off early. Best to avoid that, if possible.
Best Debt Consolidation Loans
LightStream – Best Value
LightStream is the online lending division of Truist Bank, and it offers personal loans of up to $100,000 for a variety of needs, including debt consolidation, as well as loans for home improvement costs. The company can be very flexible with its repayment schedule, offering up to 12 years to repay your debt, which is quite high for the industry.
LightStream is an attractive, affordable option for many people, as it doesn’t charge origination fees, late fees or prepayment fees.
The main drawback for LightStream is that it is geared towards people who already have a very strong credit score, as its minimum FICO score is 660 and you will need several years of credit history to qualify. This puts the company’s services out of the reach of people with poor credit history who are looking to pay off their debt and rebuild their score.
- No origination or late fees.
- Competitive APR rates of 5.95% – 17.29%.
- Large loan amounts are available.
- Must have a high credit score and several years of credit history to qualify.
- Initiates a hard credit check on applicants, which will temporarily lower your credit score.
- Limited customer service options, as all inquiries must be sent to LightStream’s website, with no option to call or chat with a customer service representative.
Upgrade – Best For Low Credit Scores
Upgrade is an online lending company that can approve and fund a loan in as little as a day.
Upgrade offers a variety of options that make it attractive to borrowers with a low credit score. It’s willing to loan to people with a FICO score of 580, and if you apply with a co-signer with a strong credit history, you might be able to receive a bigger loan or better rate than you would on your own.
Upgrade offers loan terms of up to seven years, but it can charge an origination fee of up to 8%, and it’s lowest APR amount, 5.44%, is still fairly high for the industry.
- Co-signers allowed.
- Available to people with low credit scores.
- Loans available within a day.
- Potentially high origination fee.
- $10 late payment fee.
- Fairly high interest rates.
Payoff – Best For Paying Off Credit Card Debt
Payoff specializes in debt consolidation loans that can help you pay off credit card debt, and will even send direct payment to your creditors.
Additionally, the company can help you build your credit score up, which makes it an attractive option to many. It will report your payments to several credit card bureaus, so as long as you make your payments, your score will increase over time.
The catch is that you already have to have a fairly high FICO score of 640 to qualify, so it is a situation for people who want to go from good credit to great credit, or are cautious about letting debt dent an otherwise solid rating.
- No late fees.
- Reports payments to credit card bureaus.
- Offers direct payment to creditors.
- Fairly low loan limit of $40,000.
- Can charge an origination fee of up to 5%.
- Can take up to a week to receive funds.
PenFed – Best For Small Loans
If the amount of your overall debt isn’t all that high, and you only need to borrow a relatively small amount of money, then PenFed might be a strong option for you, as it offers loans for as little as $500 and up to $35,000.
PenFed offers small loans to members of its credit union, though anyone can join by opening a savings account for $5. Unlike with many credit unions, it’s possible to pre-qualify for a loan to see what offers are available.
- No origination fee.
- Maximum APR rate of 17.99%, which is low for the industry.
- Joint applications are available to help you qualify for a loan.
- $29 late fee charge.
- Minimum three-year credit history puts it out of the range of some people.
- The low maximum loan amount won’t be ideal for people with larger debts.
SoFi – Best For High Credit
If you already have a high credit score and just need some help with your debt, SoFi might be a great option. It doesn’t charge an Origination Fee, and offers loans of up to $100,000.
The main problem is that the loans are only available to people with an already high FICO score of 680, leaving it out of the reach of people with fair credit histories.
- No origination fees.
- Offers unemployment protection, as well as free career and financial advice services.
- Maximum APR rate of 19.63% is low for the industry.
- Minimum credit score of 680.
- Can’t secure a loan with collateral such as a car.
- May take up to 15 days to receive funds if self-employed.
Other Lenders We Considered
- Will accept credit scores as low as 600.
- Lets you compare offers from different companies for free.
- Offers educational tools to help improve your credit situation.
- You may not qualify for every loan you are offered.
- Some companies you get matched with will charge fees.
- May received unsolicited ads after signing up for the service.
- Lets you compare personal loan offers from multiple companies.
- Free to use.
- Using doesn’t affect your credit score.
- Fiona is not a direct lender, and will merely match you with lenders and then back out.
- Interest rates may vary, depending on which companies you get matched with.
- Some companies will charge an origination fee.
How We Found the Best Consolidation Loans
When searching for the best consolidation loans, we kept the following attributes in mind, first and foremost.
Rates: We didn’t select any lenders that exceeded Toms’ parameters of 13%-25% APR, with the exception of Upgrade.
Fees: While origination fees can be hard to avoid, we didn’t select many lenders that went too far beyond the 1% to 5% average.
Credit Scores: While some lenders will insist on a high credit score, we kept an eye out for institutions that will lend to someone with a FICO score of 600 or lower.
Payment Schedules: Because everyone’s monthly income and ability to pay off a debt will vary by situation, we looked for companies with flexibility when it comes to payment schedules.
What if I Have a Bad Credit Score?
Having a “bad” credit score, usually defined as below a FICO score of 660, doesn’t necessarily preclude you from getting a debt consolidation loan. “Traditional credit data may not always depict a consumer’s complete financial profile and ability to pay debts,” says Toms. “Some lenders will have one-on-one conversations to better understand credit scores and profiles, savings, life insurance or other factors that indicate the consumer is financially responsible.”
How Do I Get A Discount On My Rate?
If you have a higher credit score, some lenders will give you a lower interest rate, perhaps as low as 4%. But if you have a lower credit score, you still might have some options. “Some lenders may offer a discounted rate if there is a co-borrower with sufficient income, or if the applicant has a certain level of retirement savings,” notes Toms. It is also possible, in some situations, to use your home to guarantee a better rate, if you have enough equity. Proceed with caution, though, “since these options use your home as collateral, you could face a foreclosure if you do not keep up with payments for any reason.”
How Do I Get My Money?
You can usually apply online, and very often you can get the money deposited directly into your bank account. From there, “people simply use their funds to pay off credit cards and pay back at their lower rate over a fixed time period,” says Nelson. “This eliminates expensive revolving credit card rates and extended pay-off timelines.”
What Are Some Drawbacks To A Debt Consolidation Loan?
It’s worth keeping in mind why you need the loan in the first place. If your spending habits got out of hand, it’s important to learn from your mistakes once you put away your debts. “What is the real reason you need the loan? If it’s living outside your means, a personal loan can just be a temporary stop-gap measure,” says Toms. “It’s important to understand the reason, the finite nature of the loan and how it fits into your long-term financial planning.”
What Are Some Other Options To Debt Consolidation Loans?
If you can’t qualify for a debt settlement loan or you don’t think you can make the payment schedule, you can look into debt settlement or debt management. A debt settlement company can attempt to get your creditors to accept less than the original amount as payment. Some will be willing to accept this, because at least they get some payment. You will then pay back your debt settlement agency. It can hurt your credit score, but it will at least stop any harassing phone calls you’ve been receiving.
Alternatively, some companies offer debt management services. For people with the income to pay off their debts but feel overwhelmed, a debt management service can help them devise a game plan to chip away at what they owe.
Do Debt Consolidation Loans Help Or Hurt Your Credit Score?
If you make your payments on time, you can begin to increase your credit score. You can also increase your credit score over time by reducing and eventually paying off your debt.