Best Debt Consolidation Loans Of October 2022
If you’re ready to take control of your finances, debt consolidation can be an effective way to streamline payments and potentially lower your interest charges. It can also lower your monthly debt payments.
This is because, unlike credit cards, medical loans and other forms of debt, personal loans often come with lower interest rates—especially if you have good to excellent credit. Many lenders also offer direct payments to third-party creditors, so you won’t have to worry about the logistics of consolidating your other debts.
The best personal loans for debt consolidation offer low annual percentage rates (APRs) and flexible repayment terms, while avoiding fees like prepayment penalties, so you can retire debt early without paying fees.
How to Apply for a Debt Consolidation Loan
Although the process varies by lender, follow these general steps to apply for a personal loan:
- Check your credit score. Check your credit score for free through your credit card issuer or another website that offers free scores. This will help you understand your creditworthiness and chances of qualifying. Aim for a score of at least 610; However, a score of at least 720 will give the most favorable terms.
- If necessary, take steps to improve your credit score. If your score falls below 610 or you want to raise your score to get the best terms possible, take the time to improve your score before applying, such as reducing your credit utilization or paying off unpaid debt.
- Determine how much debt you need to collect. Once you check your credit score, calculate how much money you need to borrow to consolidate all your debts. Remember, though, that you’ll receive your money in one lump sum, and you’ll have to pay interest on the entire amount—so only borrow what you need.
- Shop around for the best terms and interest rates. Many lenders will let you pre-qualify before submitting your application, which allows you to see the terms you’ll receive with just a soft credit inquiry and without damaging your credit score.
- Submit a formal application and wait for a loan decision. After you find the lender that offers the best terms for your situation, submit your application online or in person. Depending on the lender, this process can take anywhere from a few hours to a few days.
Tips for Comparing Personal Loans for Debt Consolidation
Personal loans are often available online through traditional banks, credit unions and alternative lending platforms so you can apply quickly and conveniently without visiting a bank branch. Many of these lenders also offer competitive interest rates and flexible repayment terms, which means you may be able to save money by consolidating your other debts.
Consider these tips when comparing personal loans:
- Where possible, prequalify. Many personal loan providers offer potential borrowers the ability to pre-qualify for loans. This means that the applicant can submit details about their credit requirements, income, housing status and other relevant information to know what kind of loan amount, rates and repayment terms they are eligible for. Even better, this process usually only requires a soft credit inquiry so you can make the purchase without damaging your credit score. If you think you might benefit from consolidating your debt—but aren’t sure what rates you’ll qualify for—the prequalification process can streamline your search by ruling out lenders with higher rates.
- Consider the purpose of your loan. While personal loans can be used for a wide range of purposes, they are limited to things like consumer debt consolidation, home improvements, vacations, weddings, funerals, major purchases, and other personal expenses. For that reason, lenders often prohibit you from using personal loans for postsecondary education expenses, business purposes, and at least for illegal activities. When considering a lender, always make sure that debt consolidation is an acceptable use of loan funds. Better yet – determine if the lender will pay your other creditors directly.
- Watch out for additional fees. Some lenders offer fee-free personal loans in which borrowers are not required to pay origination fees, late payment fees, prepayment penalties or other common loan costs. However, this is more the exception than the rule, so it’s important to ask about fees when shopping for the best loan terms. This is especially important if you’re trying to save money by consolidating debt because fees can eat into your savings over the life of the loan. Likewise, if a lender charges an origination fee, know whether it’s built into the APR or taken from the loan amount before funding, as this can affect the loan amount you need to request.
- Evaluate the lender’s customer support options. If you have found a lender who is willing to offer you the money you need on acceptable terms, there is one more thing to consider before signing the loan agreement. Customer support may not seem like a big deal in the honeymoon phase of your loan, but it can make a huge difference if you face payment issues or financial hardship during your repayment period. Review the lender’s customer service resources and read reviews from past and current borrowers to ensure they are a good fit.
What is a Debt Consolidation Loan?
Debt consolidation is when borrowers take out new loans, usually with more favorable terms (lower interest rates, lower monthly payments, or both) and then use the loan proceeds to pay off their other personal debts. Debt consolidation loans are commonly used to help pay off credit card balances, auto loans, and other personal loans.
How do debt consolidation loans work?
To start consolidating debt, apply for a personal loan through your bank or other lender. Once your lender approves you for a debt consolidation loan, they may offer to pay off your other debts automatically—or you can take the cash and pay it off yourself.
After paying off your pre-existing debt with your new debt consolidation loan funds, you’ll make a single payment on your new loan each month. While debt consolidation often lowers your monthly payment, it accomplishes this by extending the loan term of the consolidated loan. Debt consolidation also streamlines payments and makes managing money easier, such as having a single monthly payment due date.
How to Get a Debt Consolidation Loan for Bad Credit
If you have bad credit, you can strengthen your application by improving your debt-to-income (DTI) ratio. You can do this by increasing your income—with a side hustle or otherwise—or by paying down some of your smaller, more manageable debts. If you choose to pay off some of your debt, this can also help improve your credit score, accomplishing two things at once.
You may also have better luck applying for a secured loan, which is more accessible to applicants with bad credit because it lowers the lender’s risk and often comes with lower interest rates.
Does Debt Consolidation Hurt Your Credit?
Consolidation loans can affect your credit score in several ways. Applying for a loan requires a rigorous credit check, which may result in a slight drop in your credit score. However, the effect of inquiries on your score will diminish over time and usually disappear after two years. If you take out a debt consolidation loan, pay off your credit cards, and then take on more debt on those cards, your credit score can also drop.
That said, consolidating loans is a great way to streamline your payments, lower your monthly debt service, and create healthy financial habits through regular, on-time payments. For that reason, a consolidation loan can actually help you improve your credit score over time. What’s more, some lenders offer credit tools in addition to regular lending services to help you manage your credit profile.
Best Ways to Consolidate Debt
The best way to consolidate debt usually varies for each person and their unique financial situation. Here are some great options to consider:
- Debt Consolidation Loans. Personal loans are one of the most common ways to consolidate multiple debts. This method will help you streamline all your debt payments under one loan.
- Balance transfer credit cards. Highly qualified borrowers can typically get no-interest financing through a balance transfer credit card for periods longer than a year to 18 months. This debt consolidation method is a great way to streamline your payments while avoiding interest during the promotional period. However, interest will start accruing on the unpaid balance at the end of the promotional period.
- Home equity. If you have enough equity in your home, you can use a home equity loan or home equity line of credit (HELOC) to help consolidate your debt. However, be careful with this option. Because your home secures the loan, the lender can repossess your home if you fail to repay the loan.
- 401(k) Loans. A 401(k) loan is a loan you take out of your own 401(k) account. You typically borrow the greater of $10,000 or 50% of your vested account balance up to $50,000, and you typically have up to five years to pay it back.
Is debt consolidation a good idea?
Deciding whether debt consolidation is a good idea for you depends on your credit score and whether you’re taking other steps to improve your financial habits. Debt consolidation can benefit you if:
- You are committed to paying the full amount of your debt consolidation loan
- You have enough cash flow to cover all your debt payments
- You are fine to repay your loan for a long time
- You have improved your credit score since you took out your original loan
- Have a financial plan to avoid paying off your debts again
Debt Consolidation Loan Options
If you don’t qualify for a traditional debt consolidation loan or want to compare other available options, consider alternatives, including:
- Balance transfer credit cards. Some credit card providers offer cards that let you move—or transfer—current credit card debt to a new card with a 0% introductory APR, often for a small fee. As long as you pay off your debt within an early period, usually 21 months, you can avoid paying interest. Any unpaid balance will begin to accrue interest after the initial period ends.
- Home equity loan. If you have enough equity in your home, usually at least 15-20%, you may be eligible to borrow up to 85% of your equity. Funds are disbursed as a lump sum payment, which you can use to pay off high-interest debt, and interest is owed on the full loan amount. Home equity loans are secured by your home, which means the lender can repossess the property if you default on the loan.
- Home Equity Line of Credit (HELOC). Like a home equity loan, a HELOC gives you access to funding through your home equity. However, instead of receiving the funds as a lump sum payment, you will have access to a line of credit that you can use as needed and use again as you pay off your balance during the draw period. You will pay interest only on the amount borrowed and not on the full amount due.
We reviewed 15 popular lenders based on 11 data points in the categories of loan details, loan costs, eligibility and accessibility, customer experience and application process. We have selected the 10 best lenders based on the weightage assigned to each category:
- Loan Cost: 35%
- Loan Details: 20%
- Eligibility and Accessibility: 20%
- Direct payment to creditors: 15%
- Customer Experience: 10%
Within each category, we also considered several characteristics, including available loan amounts, repayment terms, APR ranges, and applicable fees. We also looked at minimum credit score requirements, whether each lender accepts co-signers or joint applications, and the lender’s geographic availability. Finally, we evaluated the availability of each provider’s customer support team.
Where appropriate, we awarded partial points based on how well the lender met each criterion.