At a Glance

The rate you get for a debt consolidation loan depends completely on your financial circumstances and credit background, as well as the lender you’re getting the loan through.

Each lender has different requirements, minimum interest rates, loan terms, fees and penalties, and customer service reviews that should be carefully taken into consideration before making a final decision. However, since the primary purpose of consolidating your debt is to get a better interest rate than those you currently have, it’s important to get an average or low interest debt consolidation loan.

Read on to learn more about:

What is debt consolidation?

If you have credit card debt, auto loans, student loans, medical bills, personal loans, or other types of debt, you may want to consider consolidating with a debt consolidation loan.

When you consolidate your debts, you’re combining multiple debts into one, more manageable, lower-interest payment. Because some unsecured debts, like credit cards, have high interest rates, consolidating them into one lower-interest payment will help you pay off your debt faster, and save you money in the long-run.

Not only does this free up your budget and add flexibility, it also eliminates the hassle of keeping track of multiple payment due dates and amounts.

Unsecured consolidation loans, such as personal loans or balance transfer credit cards, are great options for those who have excellent credit. Secured loans, like home equity loans, have lower interest rates, but you’re likely putting your home or savings at risk.

You can use online tools like a debt consolidation calculator to get a personalized recommendation and to learn if debt consolidation is right for you.

How are debt consolidation loan rates determined?

When a lender is determining what their debt consolidation loan rates will be, they take into consideration a few factors:

  • Whether the loan is secured or unsecured. Secured means there’s collateral underlying the loan, like a mortgage, so even if you default on payments the lender will still get their money. However, most debt consolidation loans are unsecured, which makes them riskier for the lender and rates higher.
  • They are made for large amounts of debt. Those who have minimal debt, or only a few types of debt, likely aren’t looking to consolidate. Most borrowers looking for a debt consolidation loan have large balances on revolving debt, which not only drives down their credit score, but makes them riskier borrowers.
  • The debt is not eliminated. Even though the debt is shuffled into one loan that may have a lower interest rate, it’s not eliminated. If the borrower had trouble paying off the debt before, they may continue to have trouble even though they likely owe less in the long-term with the lower interest.

Then, the credit profile of the individual applying for the loan determines what their rate will be. This includes their credit score, credit history, amount of debt to consolidate, and debt-to-income ratio.

Average debt consolidation interest rate

The average annual percentage rate (APR) on a debt consolidation loan is about 22.59%, though they can range from 6% to 36%. The average for those with excellent credit stayed around the 5.99% range in 2021.

Here are some of the top lenders and their average debt consolidation APRs:

Lender APRs
Upstart 4.81-35.99%
Payoff 5.99-24.99%
LightStream 4.49-20.49%
Marcus by Goldman Sachs 6.99-19.99%
Upgrade 5.94-35.47%
Discover 5.99-24.99%

Keep in mind that the higher your credit score, the lower your interest rate will be. An average credit score (670-720) will yield a 9-11% interest rate on average, while a score under 600 will generally yield a 17-25% interest rate or higher.

Most lenders require a minimum credit score of at least 580, but if you want to get the best rate, you may need a credit score of 740 or higher.

Your rate may also depend on the loan term. Increasing or decreasing your loan term could have a significant impact on your loan rate; however, some lenders charge the same interest rate regardless of term.

How to get the best low interest debt consolidation loan

When searching for a debt consolidation loan, you’ll want to make sure you have the following in order to get the best interest rate:

  • An excellent credit score. If you want to get the lowest interest possible, it’s important to have an excellent credit. With very good or excellent credit (740 and higher), you show you’re a low risk to the lenders and they are more likely to reward you for that.

    If your credit score needs improvement, take the following steps before applying for a consolidation loan:

    1. Review your report and understand what may be helping or hurting your score, and also make sure everything is accurate.
    2. Make sure you pay your bills in full and on time each month, because payment history makes up about 35% of your score.
    3. Try to keep your credit utilization low, which means even if you have a $10,000 limit on your credit card, you aren’t spending $10,000 per month. Try to keep your total outstanding balance at least 30% or less of your total credit limit.
    4. Avoid closing any credit accounts, because the age of credit accounts helps show your credibility. The older your average credit age, the more favorable you are to lenders.
    5. Avoid any new credit inquiries.
  • A low debt-to-income ratio. Some lenders may require a minimum annual income to qualify for a great interest rate, and they will look at your debt-to-income (DTI) ratio, which is the percentage of your gross monthly income that goes toward paying your debts. The lower your ratio the better, because it signals you don’t spend too much on your income on debts.

    Generally, lenders like to see a DTI of 30% or lower.

  • A clean credit history. Lenders want to make sure your credit history is free from bankruptcies, tax liens, repossessions and foreclosures. They also want to make sure you always make your payments and that they are on time. A messy credit history can signal to the lender that you may not be able to pay back the debts.

Once you know your numbers, and are working toward improving them if necessary, the next step to finding the best interest on a debt consolidation loan is to shop around. Visit comparison websites that have already compiled top picks, or do some internet research on your own.

Most lenders offer fixed-rate personal loans, though some offer fixed and variable. Variable means it can change over time, so if you’re looking for the lowest rate, you may want to avoid these.

Lenders also usually offer pre-qualification or rate-check tools to compare the actual rates you can expect to receive. This will give you the most accurate estimation for your personal situation. This will not hurt your credit score.

Then, in addition to interest rates, other information you’ll want to pay attention to includes:

  • Loan terms
  • Fees and penalties
  • Repayment options
  • Customer satisfaction ratings
  • If the loan is secured or unsecured
  • If the interest rate is fixed or variable

If you need assistance, talk to a certified counselor from a nonprofit credit counseling agency. They can help analyze your situation and provide advice for the best way to tackle your debt.

Commonly asked questions

Can I get a low interest consolidation loan with bad credit?

While it’s not impossible to get a debt consolidation loan with poor credit, it’s much more difficult to get one with low interest. Excellent credit signals to the lender that you’re a trustworthy borrower who will pay the debt back. With bad credit, the lender may not want to take that risk.

Does consolidation lower interest rates?

One of the primary goals for debt consolidation is to lower interest rates. Ideally, your debt consolidation loan will have a lower rate than your other debts, so when you consolidate, you’re paying less in interest and will save money over time. If the interest rate of the consolidation loan is not lower than your other debt, it may not be the best option for you.

Will a debt consolidation loan affect my credit score?

Debt consolidation loans typically boost your credit score, but you must make your payments on time and avoid adding to your debt. This is because you’re lowering your amount of revolving debt, which is a line of credit you can borrow against and repay over and over (like a credit card).