Many people won’t think twice about buying a different brand of yogurt to save a few dollars, but they might not think to consolidate their debt in order to save hundreds or even thousands of dollars in interest and lower their payments.
A debt consolidation loan is essentially a loan that you take out in order to pay off other loans that are higher in interest. You can use debt consolidation loans to pay off any kind of debt, but most people use them to pay off high interest personal loans, auto loans, or credit cards.
This type of loan can also make sense if interest rates suddenly fall or if your credit score or income improve and you can qualify for a lower rate.
The process for getting the best debt consolidation loans can be relatively easy since you can now apply for them online with a quick application. Since almost all debt consolidation loans don’t require collateral, getting one can also be particularly beneficial if your current debt is secured to your home or your car and you no longer want it to be, or if you need to sell one of those assets.
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Best Debt Consolidation Lenders by Category
Select your credit rating below and see what each lender is the best for in the full review.
Best for: Quick Funding, Flexible Repayment, No Fees, High Loan Amounts
LightStream tops the list as our best debt consolidation loan lender for borrowers with good credit. The minimum credit score to be approved for LightStream is 660 and there are no fees whatsoever.
LightStream also leads the categories of High Loan Amounts, Flexible Repayment, and No Fees.
The company offers fee-free loans ranging from $5,000 to $100,000 which can be beneficial for those who need to consolidate a large amount of debt.
Furthermore, LightStream offers repayment terms from 2 to 7 years. This allows borrowers to decide between paying their loans off fast – saving them money in interest – or extending their repayment over a longer period of time – giving them a lower monthly payment.
Best for: No Fees, High Loan Amounts
SoFi is our second best good credit lender and is tied for first in the No Fees and High Loan Amounts categories.
SoFi allows you to borrow between $5,000 and $100,000 to consolidate your debt. Since it deposits the money directly in your bank account, you can use the funds to pay off any kind of debt.
SoFi requires a credit score over 660, but the average credit score of approved borrowers is 700. The lender also requires that you have a high income, about $101,000, on average.
Like LightStream, SoFi charges no fees which can help keep the total cost of your loan low relative to other lenders.
3) Citizens Bank
Best for: No Fees
Citizens Bank comes in as our third best lender for debt consolidation loans for those with good credit and is tied for first in the No Fees category.
Citizens Bank offers debt consolidation loans between $5,000 and $50,000. The money goes directly into your bank account so you can pay off any credit card debt or other loans you may have.
Borrowers must have a minimum credit score of 680 and income of $24,000 in order to be eligible. Approved applicants may choose a loan term ranging from 3 to 7 years and will never have to pay any fees.
Best for: Flexible Repayment, No Fees, High Loan Amounts
Marcus leads our list of the best debt consolidation loans for borrowers with fair credit. The lender also leads the Flexible Repayment, No Fees, and High Loan Amounts categories.
Marcus requires borrowers to have at least a 660 credit score and offers fee-free loans of up to $40,000.
The lender offers the most flexibility when it comes to repayment, allowing borrowers to choose a term length between 3 and 6 years. This can help make sure the monthly payment amounts fit into your budget, and since Marcus charges no prepayment penalties, you can pay off your loan early at any time.
Best for: Quick Funding, High Loan Amounts
FreedomPlus is our second best fair credit debt consolidation loan lender and leads the Quick Funding category. The lender is tied for the High Loan Amount category.
FreedomPlus allows you to borrow between $7,500 and $40,000 to consolidate any kind of debt and will deposit the funds directly in your bank account.
FreedomPlus requires a minimum credit score of 640 and funds are deposited in two days. Repayment terms range from 2 to 5 years.
Payoff rounds our our list of the best debt consolidation loan lenders for fair credit.
Payoff is an online lender that allows you to consolidate between $5,000 and $35,000 in credit card or other debt through a debt consolidation loan, and funds will be available in 2 to 7 days.
You can choose a repayment term from 2 to 5 years with Payoff’s debt consolidation loans and origination fees range from 0%-5%.
Payoff requires that borrowers have a minimum credit score of 660, 3 years of good credit history, and a debt-to-income ratio of under 50%.
1) OneMain Financial
Best for: No Fees, Quick Funding
OneMain Financial is our highest rated lender for borrowers with poor credit and also leads the No Fees and Quick Funding categories.
OneMain offers debt consolidation loans up to $30,000 and funds are available on the same day as the application.
Furthermore, OneMain charges no fees of any kind to borrowers. This can be a big help in reducing the total cost of the loan. Lastly, loan terms range from 2 to 5 years.
Best for: Quick Funding
Oportun comes in second on our list of poor credit lenders and is tied for first in the Quick Funding category.
The lender offers debt consolidation loans of only up to $9,000, but funds are deposited the same day. One thing that makes Oportun stand out is that the lender may approve borrowers with little or no credit history.
Repayment terms on Oportun’s debt consolidation loans range from 7 to 46 months and there is only a 4% late fee if you miss a payment.
Best for: High Loan Amounts, Flexible Repayment
Avant comes in as our third best debt consolidation loan lender for borrowers with poor credit and also leads the High Loan Amounts and Flexible Repayment categories.
Avant offers loans of up to $35,000 to approved borrowers which is significantly higher than other lenders for borrowers with poor credit. If you need to consolidate a large amount of debt but don’t have a good credit, Avant may be your best choice.
Repayment terms range from 2 to 5 years, giving borrowers a lot of control over what their monthly payment will be. Avant does charge an origination fee of 0%-4.75% and a late fee of $25.
Avant requires borrowers to have a minimum credit score of only 580 and a minimum income of $20,000.
How We Chose the Best Debt Consolidation Loans
To find the best debt consolidation loans, our Editorial Team reviewed 37 personal loan lenders based on product information, fees, eligibility & application, customer support, and discounts & benefits. There were multiple data points analyzed within each category and each data point was weighted by importance.
Learn more about our ratings and methodology here.
When a Debt Consolidation Loan Makes Sense
You Are Eligible for a Lower Interest Rate
A debt consolidation loan can be a good idea if you qualify for a lower interest rate loan than you are currently paying on your other debt. In that case, you save money by immediately reducing your interest rate and your monthly payment. You can then use the extra money that your reduced payment frees up to make additional payments toward your debt in order to pay it off faster – or use that money for other expenses. A debt consolidation loan can save you as much as hundreds or even thousands of dollars over the life of the loan.
You Want to Reduce Your Monthly Payment
You can also change the term length of your loan or debt when you receive a debt consolidation loan in order to further reduce your monthly payment if you are struggling to pay your bills. Just note that by extending your repayment, you may end up paying more in interest over the life of your loan depending on your old and new interest rates.
When consolidating loans for this reason, this might be the last resort for people who are struggling with debt before considering options like bankruptcy and debt settlements, which have a lasting impact on your credit. But debt consolidation can also be a great strategy to ensure that you don’t default on your loans or make late payments, which will also hurt your credit score.
You Want to Only Make One Payment a Month
The best debt consolidation loans will also simplify your bill payments by giving you just one single payment to worry about and keep track of every month instead of multiple loans. When you receive a debt consolidation loan you can combine multiple forms of debt into one for easier management.
Debt Consolidation Loan Eligibility Requirements
Whether or not you are eligible for a debt consolidation loan depends on a few factors. Read on to learn more about these requirements to see if you may be eligible.
The first and most important factor is your credit score. In order to qualify for a consolidation loan at an interest rate that’s lower than what you’re paying on your other debt, you’ll likely need a fairly high credit score.
But how high your credit score will need to be to enable you to qualify for a debt consolidation loan at a good rate will depend on a number of factors such as the lender, your financial situation, your credit situation, and the type of debt you’re refinancing. For example, if you have credit card debt that is charging you 29% APR, you might still be able to qualify for a consolidation loan that charges you much less even if you have bad credit.
However, if you’re refinancing a personal loan that is charging you 9% APR and you have bad credit, you might not be able to get a lower interest rate than what you’re currently paying. This could be especially true if your debt is mostly in personal loans or auto loans, as these tend to already offer low rates. If your debt is secured debt, it can also be harder to get a consolidation loan at a lower rate than what you’re currently paying.
Your income is also a factor in whether you should consolidate your debt. How much you make will impact how much you can borrow and possibly what rate a lender will offer you. Lenders like to know that you can afford your monthly payments so having a steady income is important.
Creditworthy Cosigner (If Necessary)
Many of the best debt consolidation loan lenders allow you to have a cosigner, so if you know someone who has good credit, a steady job, and is willing to cosign for you, then you might want to allow them to do so. You’ll then be evaluated based on your cosigner’s credit and income instead of your own. A big downside to this is that if you are unable to pay your consolidation loan, your cosigner will be responsible for it.
Ready to compare your debt consolidation options? Click here.
Types of Debt Consolidation Loans
Some of the best debt consolidation loans are applicable to any kind of debt and simply deposit the funds into your bank account. But there are also certain loans that are targeted to helping you pay off particular kinds of debt.
Consolidating Credit Card Debt
Some debt consolidation loans are specifically created to consolidate credit card debt. They often make financial sense because of the high interest rates that credit cards charge in comparison to the best credit card consolidation loans.
For example, if you currently have $10,000 in credit card debt and are being charged 25% APR and repay that debt in five years, you will pay $294 per month and $7,583 in interest. If however, you can consolidate that debt at a rate of 5%, you will pay only $189 per month and just $1,320 in interest. If you can consolidate that debt at 10% interest, you will pay $212 per month and just $2,757 in interest. Even if you have to pay 15% in interest, you would still only pay $237 per month and $4,271 in interest. As you can see, the savings are significant.
Getting a debt consolidation loan also helps you stay focused on paying off your debt. With credit cards, all you have to pay is the minimum payment and once you pay off part of your balance you can charge more purchases onto your card since it is a revolving form of debt. For some people, this creates a cycle in which they’re constantly charging new things on their cards and not on their way to being debt-free.
But with a debt consolidation, loan you lock yourself into a term length where you commit to paying off the full amount of your debt over a period of anywhere from two to over 10 years or more. That will allow you to stay motivated on your debt repayment because it will give you a sense of accountability.
Another big benefit of a debt consolidation loan over a credit card is that you can choose a fixed interest rate. Credit cards have variable interest rates, which means that they can go up and down along with fluctuations in the prime interest rate. But if you get a fixed rate debt consolidation loan, you can lock in a low interest rate. Given that interest rates are currently low, they’re likely to go up in the future, so locking in a fixed rate now is a good plan.
Consolidating Medical Debt
Another common kind of debt consolidation loan is a medical debt consolidation loan. When you have an urgent medical need, you’re often desperate to get the money to pay off your medical bills before they go into collections. And you might not have spent time searching for the best interest rate – or had the capacity to do so if you or a loved one were seriously ill.
For that reason, you might have chosen the first loan offered to you and could be paying more than you need to on your medical loans. Or maybe you were unemployed or had bad credit when you had to pay your medical bills, and now you’ve improved your personal credit and financial situation. This is common since many people can’t work when they are sick.
In that case, a medical consolidation loan is a great way to reduce your interest rate or change the term length of your loan. This can help you pay it off more quickly or make your payments more manageable.
Debt Consolidation vs. a Balance Transfer Credit Card
While consolidating your debt with a debt consolidation loan is one easy way to fast-track your debt repayment, another common method is to get a credit card that has a 0% introductory interest rate and transfer your credit card balance to that card. This could be a good option if you can qualify for the credit card as you won’t have to pay interest on your debt for the introductory period. You will, however, often have to pay a balance transfer fee, which is usually between 3% and 4% of the total cost of your debt. This amount gets tacked onto your credit card balance.
Whether a 0% introductory rate credit card ends up being a better choice for you than a debt consolidation loan will depend on your personal financial and credit situation, as well as the interest rate you’ll be able to qualify for.
It will also depend on the length of the introductory rate. If it’s six to eight months, it might not make sense to pay the balance transfer fee compared to taking out a debt consolidation loan which, if you have a good credit score, could start as low as 5% APR. However, if the introductory period on a balance transfer credit card is 12 to 18 months, it could make sense to do so. The important thing to remember is that after the introductory period is over, you will have to start paying interest at the card’s regular variable interest rate, which will likely be much more expensive than one of the best debt consolidation loans.
For that reason, it’s important that you have a plan for what you’ll do when the introductory period is over if you don’t think you’ll have your debt completely paid off by that point. You could get another 0% introductory interest rate card and transfer your balance onto that, or you could decide to take out a debt consolidation loan at that time.
If your financial or credit situation has worsened since you originally transferred your debt, however, you might not qualify for the same rates and you could end up paying more. The benefit of the best debt consolidation loans is that you can lock in a low rate if you get a fixed-interest loan.
Ready to compare your debt consolidation options? Click here.
Shopping for the Best Debt Consolidation Loan
How to Compare Your Options
When it comes to the best debt consolidation, there are a number of loan options to choose from. Many banks and credit unions offer debt consolidation loans, and many online lenders also offer these types of loans. Some lenders that don’t offer debt consolidation loans specifically offer personal loans to consolidate your debt. The lender that is right for you will depend on your personal financial and credit situation.
If you have excellent credit, you’ll likely have your pick of lenders, but you might not want to just choose the one that offers the lowest rate. First, consider whether they’ll give you a variable or fixed rate loan and what kind of term lengths they’ll offer. You might decide that having a longer term length is more important than saving a half-percentage point in interest.
You’ll also want to know what kinds of fees will be charged. Things like origination fees, document fees, or prepayment fees add costs to your loan and could mean that you’ll pay more than if you chose a loan with a slightly higher interest rate. Some lenders also offer discounts if you sign up for auto-debit on your loans, so be sure to look into that.
If your credit score is below 700 or 600, it will be more difficult to find a lender since some lenders have cutoffs around those ranges. You might need to seek out lenders who specialize in lending to people who have average or bad credit. You’ll pay more in interest, but you should also be more careful in reading the fine print on these loans. Many lenders that specialize in lending to people with bad credit add on fees that could cause the costs of the loan to skyrocket. It’s important therefore to not just look at the interest rate charged, but to look at the APR, which should include all fees related to the loan. That will make comparing a loan from one lender to another much easier.
When it comes to choosing the right loan, it’s important to shop around. The more quotes that you can get from different lenders the better. One way to compare lenders is to use an online loan marketplace. These websites allow you to fill out just one application and get a number of quotes from different lenders that you can compare. This can save you time and make it easier for you to see differences between loan offers so you can decide which one is right for you. Once you decide on the lender you want, you can fill out a complete application on their website.
Why You Should Look for Companies That Do Soft Credit Pulls
When you’re looking for any kind of loan, it’s important that you look for a company that does a soft credit pull in order to pre-qualify you as a borrower. A soft credit pull is when a company does an unofficial credit inquiry to get a general idea of your credit profile. This gives them just enough information to determine whether how likely they are to lend to you and what kind of interest rates you’re likely to qualify for. This allows you to find out if they are a good fit as a lender without doing a hard credit pull.
A hard credit pull is when a company officially contacts one or more credit bureaus in order to pull your credit report. Some companies require a hard credit pull before they will give you a quote for a debt consolidation loan. A hard credit pull will be noted on your credit history. Every time you have a hard credit pull on your credit history, your credit score goes down a little.
What to Look for in the Fine Print
The most important thing that you should pay attention to in the fine print is whether your debt consolidation loan charges fees. Origination fees can tack on anywhere from 1% to 8% to the cost of your loan. Some loans also charge you a prepayment fee that requires you to pay 3% to 5% extra if you repay your loan before it’s due. Even if you don’t think you’ll be repaying your loan more quickly, it’s a good idea to avoid loans with prepayment fees because you never know when you might suddenly decide you want to get out of debt and you don’t want to be penalized for it.
Another red flag to look out for are any penalties that you might incur if you pay your loan late. Those fees can add up.
Ready to compare your debt consolidation options? Click here.
Alternatives to Debt Consolidation
Many people turn to debt consolidation loans as a last resort because they’re struggling with their debt and need to reduce their loan payments. For these people, the alternative to debt consolidation loans could be not being able to pay their bills. If you’re wondering if another option might be better for you – read on. We break down alternatives to help you understand the pros and cons of each.
Loan consolidation involves combining many loans or credit card debts into one loan, but you can also refinance your debt. Refinancing debt is when you replace one loan with another. Refinancing your debt is very similar to consolidating your debt except that you may not be able to combine multiple debts. Otherwise, the same principles apply that you can potentially find a better interest rate and better terms by applying for a new loan.
If you’re unable to pay your debt, you might want to try to negotiate a debt settlement with your creditors. This is what happens when a creditor agrees to reduce your debt balance in order to make it easier to for you pay off your debt.
Wondering why a creditor would do this? They don’t like to, but they are willing to consider it if you can prove that you’re in financial distress and will likely default on your debt if you are unable to come to a settlement. Lenders are often afraid that you could apply for bankruptcy and have the debt erased, so they are often eager to make a deal in order to get something from you – rather than nothing.
If you’re not able to consolidate your debts, you might want to apply for a debt management in order to avoid bankruptcy. Debt management involves working with financial counselors to follow a debt repayment strategy to help you get out of debt as quickly as possible. The counselor works with the person in debt to come up with strategies to best manage the debt –including budgeting, reducing expenses, and finding ways to make more money.
The last resort if you’re in an extreme amount of debt is often bankruptcy. This is what many people resort to when their debts are too overwhelming and they’ve tried everything else. Essentially, you go to court to get help discharging debt or repaying creditors. There are a few types of bankruptcy proceedings, but the most common ones for individuals are Chapter 7 and Chapter 13 bankruptcies.
Ready to compare your debt consolidation options? Click here.
Author: Jeff Gitlen
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