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Dana George has a BA in Management and Organization Development from Spring Arbor University. For more than 25 years, she has written and reported on business and finance, and she's still passionate about her work. Dana and her husband recently moved to Champaign, Illinois, home of the Fighting Illini. And though she finds the color orange unflattering on most people, she thinks they'll enjoy Champaign tremendously.
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If you're in debt and looking for a way to consolidate it, you're not alone. The average American carries more than $90,000 in debt, according to a CNBC report. This includes everything from credit cards to mortgages. For some, the level of debt carried is manageable, while for others it feels like a weight carried from month to month. Here, we'll tell you all about debt consolidation loans, how they work, and how to make sure you're ready to go down that path.
Here are our picks for the best debt consolidation loans.
5.0/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs. = Best = Excellent = Good = Fair = Poor
We find that SoFi stands out in the personal loan landscape by offering competitive interest rates and a generous loan limit of up to $100,000. By opening a SoFi checking or savings account and setting up auto-pay, you can enjoy a 0.25% rate reduction, which can be stacked for a total of 0.5% if you do both. Plus, there are no origination fees, late fees, or prepayment penalties, and you can benefit from same-day funding for added convenience.
4.0/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs. = Best = Excellent = Good = Fair = Poor
We think Upstart is a great option for debt consolidation and credit building. Even though Upstart has a high upper-range interest rate, well-qualified applicants can snag lower rates for a wide range of loan amounts. Upstart does charge a high origination fee and late fees, but there are no prepayment penalties, giving you extra flexibility to pay off your loan early.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs. = Best = Excellent = Good = Fair = Poor
LendingPoint has flexible credit requirements. The maximum loan limit may be lower than average, but so is the minimum. This could be a great option for someone who needs a smaller loan, as well as someone still building their credit.
Soft credit check
Low minimum loan amount
No prepayment penalty
Fast funding
Instant approval
Higher upper-end APR
Expensive origination fee
Achieve
Great for: Debt consolidation and loan customization
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs. = Best = Excellent = Good = Fair = Poor
An excellent loan option for borrowers with a high enough credit score to qualify for the lowest interest rates, lowest origination fees, and best terms for consolidating expensive, high-interest debt. If your own credit score isn't up to snuff, Achieve allows you to apply with a cosigner.
5.0/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs. = Best = Excellent = Good = Fair = Poor
Discover offers highly competitive interest rates, and we find it incredibly borrower-friendly with no origination or prepayment fees. Although its maximum loan amount is average, Discover provides long repayment terms. And, Discover knows that financial decisions are complex, so if you change your mind and return your loan within 30 days, it won't cost you a thing.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs. = Best = Excellent = Good = Fair = Poor
Upgrade is a solid choice for those seeking flexible loans with a high maximum loan amount, long repayment terms, and secured and unsecured options. We love that you can access funding quickly—often in just one day. While there’s an origination fee, you won’t face a prepayment penalty. Additionally, even though Upgrade's APR is higher than others, you can score better rates by using some of the funds to pay off other debt or offering collateral.
4.0/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs. = Best = Excellent = Good = Fair = Poor
Best Egg provides personal loans at competitive rates for folks with good to excellent credit, with the best deals going to those with top-notch scores. Although Best Egg may charge origination fees, we like that Best Egg offers a moderately high maximum loan limit and that you can get your funds as quickly as one day.
Imagine you owe money on multiple accounts. Perhaps you have several credit cards with high-interest balances, an auto loan, and a personal loan. You're comfortable with the auto loan and hope to pay it off soon, but you're concerned about how long it's going to take you to pay off the credit card debt and personal loan.
You add up the total amount of the debts you want to pay off right away and make a note of the interest rate you're paying on each. You apply for a consolidation loan with a lower interest rate and are approved. The moment you have the loan in hand, you pay off the credit cards and personal loan. Now, instead of four separate debts, you have one. And instead of paying sky-high interest rates, you're dealing with a lower, more manageable rate.
Your monthly payment goes down, your credit score improves, and you have a clear "end date." Instead of worrying about how long it's going to take you to pay the debts in full, you know when your last payment will be made.
That's because consolidation loans come with two important things: a fixed rate and a clear understanding of how many months it will take to pay the debt in full.
In short, loan consolidation can help you get out of debt faster.
Debt consolidation loan options
There are two types of debt consolidation loans: secured and unsecured. Let's look at the pros and cons of each.
Secured loans
When you take out a secured loan, you put something of value up as collateral. For example, if your grandmother left you a single gold ingot worth $6,000, you could use that ingot as collateral. Typically, banks lend money based on a loan-to-value (LTV) ratio. If the lender you're working with uses an LTV of 80%, that means the most they will lend on collateral worth $6,000 is $4,800 ($6,000 x 0.80 = $4,800).
You can use anything of value for collateral, though. Maybe you own a piece of land, valuable artwork, or a classic car you've spent years restoring. Once the collateral has been appraised to determine its worth, the lender will make the loan based on LTV.
Pros:
A secured loan is a good way for someone with not-so-great credit to qualify for a loan.
The fact that there is collateral on the line may be all the inspiration you need to ensure the loan is paid on time each month.
The interest rate on secured debt is typically lower than the rate on an unsecured loan.
Cons:
If you fail to make payments in full and on time, the lender has a legal right to take possession of the collateral, sell it, and recoup its losses. This helps explain why lenders tend to charge a lower APR on secured loans. They know that they'll receive payment either from you or by selling the asset.
Whether you're working with an online lender, bank, or credit union, make sure to find out if it offers secured loans.
Unsecured loans
The most common type of consolidation loan is unsecured debt. An unsecured loan is guaranteed by your signature and promise to repay the loan in full. Approval is based on your credit score and how well you've managed debt in the past.
Pros:
There's no risk of losing collateral due to missed payments.
It's a simpler process because you don't have to seek an appraisal on collateral.
Cons:
You'll likely be quoted a slightly higher APR than you would be quoted for a secured loan.
How to prepare for loan qualification
Once you've decided to apply for a consolidation loan, don't leave anything to chance. Applicants with excellent credit scores are quoted the lowest interest rates. This fact alone could save you thousands of dollars over the life of the loan. The following will help you prepare:
Order a copy of your credit report. According to law, you're eligible for one free report each year from each reporting agency. By filling out a simple form at annualcreditreport.com, you can receive reports from the "Big Three" credit reporting agencies: Experian, Equifax, and TransUnion.
Search for any mistakes contained in each credit report. It could be something as small as a misspelling of your name or as big as a debt that does not belong to you.
Report any mistakes to the credit reporting agency in question. Each agency has 30 to 45 days to prove the credit report is correct or remove the remark from your report.
Decide on the loan amount you need to pay off your debt.
If you're going to need a cosigner, make sure you have one ready to sign. You may want to come up with an agreement as to when you plan to remove the cosigner from the loan.
Shop lenders to find the lowest APR and fees. As part of the loan pre-approval process, most lenders conduct a soft credit check before offering you a rate quote. You don't have to worry about a soft check impacting your credit score; it's only after you've accepted an offer that a lender conducts a hard credit check to make sure everything is accurate. While a hard check will ding your credit score a bit, it should only be by a few points, and your score should recover quickly once you begin making regular monthly payments.
Sign loan documents with the lender of choice. Let them know where you'd like the funds deposited. If the lender is going to send the money directly to the creditors you're paying off, supply it with the information it'll need, including the name of the creditor, your account number, and how much you owe.
Issues to consider before taking out a consolidation loan
Not everyone who carries debt needs loan consolidation. It may be right for you if:
You're having trouble juggling too many bills.
You're not always sure you'll be able to make your payments.
You're carrying high-interest debt.
You have a high enough credit score to land a personal loan with a lower interest rate than the debt you wish to pay off.
Taking out a consolidation loan will reduce your monthly payment.
You are committed to staying out of debt once the consolidation loan is paid in full.
You are also committed to locking your credit cards away and not using them as you pay the consolidation loan.
Balance transfer credit card vs. debt consolidation
While balance transfer credit cards and debt consolidation loans have some things in common, they represent different ways to pay off debt.
Balance transfer
When a credit card offers you a balance transfer at a low rate, that rate is for a specific period of time. Let's say you have $10,000 in debt that you'd like to transfer to a credit card with a promotional rate of 0% for 18 months. That means you would have to make monthly payments of nearly $556 per month to pay the $10,000 off in 18 months and avoid interest.
If you're unable to pay the debt in full in 18 months, the APR will shoot up to the standard rate.
Debt consolidation
With a debt consolidation loan, the interest rate remains the same throughout the loan term. For example, if you pay off that $10,000 by taking out a debt consolidation loan for five years at 7% interest, your monthly payments will be $198 per month for the entire term of the loan.
Forget the personal loan myths
If you're considering a personal loan, here are a few of the common myths you might want to ignore.
You must use a consolidation loan to pay off all debt
As long as your credit score is strong and your debt-to-income (DTI) ratio is acceptable, you can choose which debts you want to pay off. There's no rule saying they must all be consolidated.
A consolidation loan will harm your credit score
A consolidation loan could actually help your credit. One thing creditors like to see is someone who has access to money but doesn't use it all. For example, if you pay off three credit cards, each carrying a $5,000 balance, each card will carry a $0 balance. That alone is enough to improve your credit score due to a factor called "debt utilization." In addition, if you make each payment as promised, those payments are reported to the credit reporting agencies, further enhancing your credit score.
Personal loan interest rates are predatory
It is true that the interest rates on personal loans can be quite high for those with poor credit scores. But if your score is high, you may find that the rate you're offered on a consolidation loan is lower by 10 percentage points or more than the rate you're paying on high-interest debt.
FAQs
Your credit score could climb. Consolidating debt leaves you with more available credit (for example, paid off credit cards). As long as you don't make charges to the cards you just paid off, the "debt utilization" portion of your credit score improves. In addition, making monthly payments on time helps boost your score.
The credit score required for a consolidation loan varies by lender. However, few will approve a loan for an applicant with a credit score below 650.
How much debt you can consolidate depends on a number of factors, including your credit history and income.
Ramsey is not a fan of debt consolidation loans, believing that it will take you longer to repay the debt. In his opinion, the longer it takes you to repay the loan, the more interest you'll pay.
We recommend you take Ramsey's advice on this topic with a grain of salt. Crunch the numbers to determine how long it will take you to pay off existing debt at the rate you're paying. Then, find out how much a consolidation loan will cost you monthly. Finally, compare the total interest paid in both scenarios.
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We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Motley Fool Money does not cover all offers on the market. Motley Fool Money is 100% owned and operated by The Motley Fool. Our knowledgeable team of personal finance editors and analysts are employed by The Motley Fool and held to the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
Discover Financial Services is an advertising partner of Motley Fool Money. Dana George has positions in Target. The Motley Fool has positions in and recommends Target and Upstart. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Motley Fool Money does not cover all offers on the market. Motley Fool Money is 100% owned and operated by The Motley Fool. Our knowledgeable team of personal finance editors and analysts are employed by The Motley Fool and held to the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
Discover Financial Services is an advertising partner of Motley Fool Money. Dana George has positions in Target. The Motley Fool has positions in and recommends Target and Upstart. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.
*Upstart Loan Disclaimer
The full range of available rates varies by state. The average 3-year loan offered across all lenders using the Upstart platform will have an APR of 21.97% and 36 monthly payments of $35 per $1,000 borrowed. For example, the total cost of a $10,000 loan would be $12,646 including a $626 origination fee. APR is calculated based on 3-year rates offered in the last 1 month. There is no down payment and no prepayment penalty. Your APR will be determined based on your credit, income, and certain other information provided in your loan application.
Personal loans made through Upgrade feature Annual Percentage Rates (APRs) of 9.99%-35.99%. All personal loans have a 1.85% to 9.99% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. Loans feature repayment terms of 24 to 84 months. For example, if you receive a $10,000 loan with a 36-month term and a 17.59% APR (which includes a 13.94% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $341.48. Over the life of the loan, your payments would total $12,293.46. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by Upgrade's bank partners. Information on Upgrade's bank partners can be found at https://www.upgrade.com/bank-partners/.
*SoFi Personal Loan Disclaimer
Fixed rates from 8.99% APR to 29.99% APR. APR reflects the 0.25% autopay discount and a 0.25% direct deposit discount.
SoFi Platform personal loans are made either by SoFi Bank, N.A. or , Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. SoFi may receive compensation if you take out a loan originated by Cross River Bank. These rate ranges are current as of 3/06/24 and are subject to change without notice.Not all rates and amounts available in all states. See SoFi Personal Loan eligibility details at https://www.sofi.com/eligibility-criteria/#eligibility-personal. Not all applicants qualify for the lowest rate. Lowest rates reserved for the most creditworthy borrowers. Your actual ratewill be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, income, and other factors.
Loan amounts range from $5,000–$100,000. The APR is the cost of credit as a yearly rate and reflects both your interest rate and an origination fee of 9.99% of your loan amount for Cross River Bank originated loans which will be deducted from any loan proceeds you receive and for SoFi Bank originated loans have an origination fee of 0%-7%, will be deducted from any loan proceeds you receive.
Autopay: The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. Autopay is not required to receive a loan from SoFi.
Direct Deposit Discount: To be eligible to potentially receive an additional (0.25%) interest rate reduction for setting up direct deposit with a SoFi Checking and Savings account offered by SoFi Bank, N.A. or eligible cash management account offered by SoFi Securities, LLC (“Direct Deposit Account”), you must have an open Direct Deposit Account within 30 days of the funding of your Loan. Once eligible, you will receive this discount during periods in which you have enabled payroll direct deposits of at least $1,000/month to a Direct Deposit Account in accordance with SoFi’s reasonable procedures and requirements to be determined at SoFi’s sole discretion. This discount will be lost during periods in which SoFi determines you have turned off direct deposits to your Direct Deposit Account. You are not required to enroll in direct deposits to receive a Loan.
Impact to credit score: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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