If you’re dealing with a significant amount of high-interest debt, it may be time to find out how to simplify your repayment with a debt consolidation loan. This type of personal loan allows you to combine your debt and, depending on your financial situation, score lower interest than your current rate.
If you’re considering this debt-relief strategy, the following information can help you make the right decision:
Debt consolidation is a type of personal loan that you can use to pay off debt. It essentially combines multiple debts into one loan you’ll repay over time.
The aim of a debt consolidation loan is to get a lower interest rate than your current rates (saving you money throughout the life of the loan) and simplify your loan payments. As long as you make consistent payments over time, it can even help to improve your credit score.
Types of debt you can pay off with a debt consolidation loan include credit cards, medical bills, payday loans, and other types of unsecured loans.
For instance, say you have five credit cards, averaging around 24% in interest with an overall balance of $26,000. Taking out a debt consolidation loan at a 15% rate could save you quite a bit and is easier to manage than juggling five payment due dates.
Related: Learn more about getting a personal loan
Debt consolidation typically makes more sense if you’re trying to pay off considerable debt. That’s because you’ll be subject to a hard credit inquiry — which can temporarily affect your credit score — and you may have to pay fees in addition to interest. An origination fee on a personal loan, for example, can set you back 0% to 8% of the loan amount.
If you’re trying to pay off a smaller debt, a debt consolidation loan may not be worth the cost. Instead, it would be better to pay off your existing loans faster to reduce the interest paid — as long as the loans don’t have prepayment penalties.
If it makes sense for your situation to consolidate your loans, follow these steps:
- Do your research: It’s a smart idea to shop around multiple lenders to compare and find the best rates and terms for your financial profile. Features to look for include interest rates, fees, repayment terms, and other perks the lender provides.
- Select a loan: Once you’ve compiled a list of potential lenders and compared them, it’s time to select the loan with the best terms for you.
- Complete the application and provide documentation: Fill out the lender’s application form and provide requested information, such as pay stubs, tax returns, and driver’s license number.
- Sign closing documents and wait for funds: Once the loan is approved, the lender will send over documents to sign. You’ll also need to provide your banking information to receive the funds. Depending on the lender, you can get money as soon as the next business day.
Understanding your debt consolidation loan’s cost can help you prepare for your monthly payments. Consider using the following personal loan calculator to estimate your loan obligation.
Shopping around for lenders increases your chances of finding a loan that best matches your needs. Consider looking at the following Credible lenders as you’re doing your research.
| Lender | Good option if you… | Terms | APR rates* | Minimum credit score |
|---|---|---|---|---|
| 1. Upstart | Have limited credit history | 3, 5, or 7 years | 5.40 – 35.99% | 580 |
| 2. Lightstream | Have good credit and are looking to borrow large amounts | 2 – 7 years | 5.99 – 23.99% | 660 |
| 3. Discover | Have good or excellent credit and want longer repayment terms | 3 – 7 years | 6.99 – 24.99% | 660 |
| 4. Reach Financial | Want customizable monthly payments | 2 – 5 years | 5.99 – 35.99% | 600 |
| 5. PenFed | Want or need a cosigner | 1 – 5 years | 7.74 – 17.99% | 660 |
| 6. Upgrade | Need to build credit and want fast funding | 3 – 7 years | 7.96 – 35.97% | 560 |
| 7. Axos Bank | Have excellent credit | 3 – 6 years | 7.99 – 15.19% | 700 |
| 8. SoFi | Want to consolidate a high balances, receive SoFi perks | 2 – 7 years | 7.99 – 23.43% | Not disclosed |
| 9. Achieve | Want to consolidate high-interest debt | 2 – 5 years | 7.99 – 29.99% | Not disclosed |
| 10. Happy Money | Want to consolidate credit card balances | 2 – 5 years | 7.99 – 29.99% | 600 |
| 11. LendingPoint | Have fair credit | 2 – 6 years | 7.99 – 35.99% | 600 |
| 12. LendingClub | Want to consolidate credit card balances | 3 – 5 years | 8.30 – 36.00% | 600 |
| 13. Best Egg | Have good credit and want fast funding | 2 – 5 years | 8.99 – 35.99% | 600 |
| 14. Avant | Have lower credit scores | 2 – 5 years | 9.95 – 35.99% | 550 |
| 15. Universal Credit | Want to build your credit | 3, 5, or 7 years | 11.69 – 35.93% | 560 |
| 16. OneMain Financial | Have lower credit scores | 2 – 5 years | 18.00 – 35.99% | none |
There are several benefits to consolidating debt, including:
Both debt consolidation and debt relief (or debt settlement) help consumers manage significant debt. While both ways include fees, they have key differences:
It’s possible to consolidate your debt with bad credit. While your options may be more limited than someone with good credit, you can find debt consolidation lenders willing to work with you. You’ll still want to shop around to find the best fit for your needs.
A couple of options include:
In addition, debt consolidation could help build your credit score. With only one monthly payment to keep up with, it may be easier to make consistent on-time payments, boosting your score.
Other ways to consolidate your bills include:
Related: Learn more about getting a personal loan