At a Glance

A personal loan for debt consolidation is just one of several strategies for getting out of debt. With a debt consolidation loan, you get a single loan from a lender and use that to pay off your remaining debts.

What to know about personal loans for debt consolidation:

How Debt Consolidation With a Personal Loan Works

When you apply for a personal loan or debt consolidation loan, the goal is to use the new loan to pay off multiple existing debts. Doing so streamlines payments to a new single monthly payment with what will hopefully be more favorable payment terms and a lower interest rate.

There are certain eligibility criteria you’ll need to meet to get a personal loan for debt consolidation, including:

  • Be at least 18 years old
  • Have legal proof of residence in the United States
  • Have a verifiable bank account that’s in good standing, i.e., not in foreclosure or bankruptcy
  • Maintain a reasonable debt-to-income (DTI) ratio of 40% or lower

How do I qualify for a personal loan debt consolidation?

To qualify for a debt consolidation loan, follow these steps:

  1. Check your credit report and score: If you have poor credit, your interest rate could be even higher than the annual percentage rate (APR) on your existing debt. That’s why it’s important to check your score before you apply for a debt consolidation loan. The three major credit bureaus (Equifax, Experian, and TransUnion) are required to provide you with a free copy of your credit report once a year if you request it.1 To avoid higher interest rates if you have bad credit, it might be worth considering a secured personal loan or a personal loan with a cosigner.
  2. Assess your existing debt: To understand which loans you’re trying to qualify for, you’ll need to know how much debt you need to consolidate. It’s best to create a list that outlines each debt, how much you owe, and the interest rate.
  3. Review loan options: Personal loans are available from online lenders, banks, and credit unions. As you compare, look for reputable lenders. And if you don’t trust yourself to pay off creditors if you receive the loan money first, find a lender that will pay creditors directly.
  4. Pre-qualify for a personal loan: The pre-qualification process means you can see how much personal loan you may be eligible for and the projected interest rate. Plus, a pre-qualification doesn’t trigger a hard credit inquiry or hurt your credit score.
  5. Apply for a loan: Once you find the perfect debt consolidation personal loan, submit an application. Then, the lender will decide whether to approve the application. If approved, you can sign to complete the loan, make sure existing creditors have been paid, and begin making payments on the new debt consolidation loan.

What Interest Rate to Expect

The key for debt consolidation loans to work is making sure the interest rate is lower than the APR on your existing debt. While rates vary from lender to lender, you can get a good idea of what your APR will be by knowing your credit score.

Credit score Average personal loan APR
Excellent (720-850) 10.3%-12.5%
Good (690-719) 13.5%-15.5%
Average (630-689) 17.8%-19.9%
Bad (300-629) 28.5%-32%

Note: Data as of May 18, 2020.

Pros and Cons of Debt Consolidation with a Personal Loan

Pros of Debt Consolidation with a Personal Loan:

  • You can lower your interest rates
  • Making your new payments on time every month can help boost your credit score
  • You’ll have fixed, predictable monthly payments
  • Debt repayment will be simpler with only one monthly payment instead of multiple

Cons of Debt Consolidation with a Personal Loan:

  • If you have a poor credit score, you may not qualify for a lower interest rate loan
  • There are often high fees
  • A debt consolidation loan won’t change existing spending habits that put you in debt

How to consolidate debt with a personal loan for:

Bad credit: Those working to improve their credit score may want to consider a secured loan that’s backed by collateral or wait until credit improves to apply for a debt consolidation personal loan. That’s because the interest rates on a personal loan for people with bad credit could be higher than the loans you’re consolidating.

Good credit: Borrowers with good credit tend to receive the most favorable rates on a personal loan. They may also qualify for a 0% APR balance transfer credit card.

No credit history: It’s unlikely that borrowers with no credit history would need a debt consolidation loan since they’ve likely taken out loans previously. But these borrowers would follow a similar process to those with bad credit by looking to secure a loan using a house or car or waiting to establish a credit history before applying.

Debt Consolidation vs. Personal loan: Which is better

Since the terms debt consolidation loan and personal loan are used interchangeably, many people wonder, “is a debt consolidation loan a personal loan?” A debt consolidation loan is a specific type of personal loan earmarked to consolidate debt. While a personal loan is an unsecured loan that can be used for any reason, a debt consolidation loan is used for the purpose of combining debts.

Which is the better option for you depends on several criteria, like:

  • Credit score: Depending on your credit score, you may qualify for a lower interest rate on a debt consolidation loan that will help you save money.
  • Loan purpose: Personal loans can be used for various financial goals, including financing home renovations or paying for a wedding. A debt consolidation loan is a personal loan with the primary purpose of consolidating debt.

How To Find the Right Personal Loan Lender for Debt Consolidation

Comparing lenders is key to discovering which loan is best for your individual needs. If you think a personal loan is right for you, compare the best personal loans from reputable lenders.

Does a personal loan for debt consolidation hurt your credit?

A personal loan has the power to both help and hurt your credit score. The result depends on your ability to manage the loan and its repayment responsibly.

You may see a dip in your credit after you initially apply for a debt consolidation loan due to the hard credit inquiry the lender makes. But that kind of credit dip tends to rebound quickly. A personal loan can also hurt your credit if you regularly make late payments or miss them entirely.

If your debt consolidation loan lowers your overall credit utilization (the ratio of credit you use vs. what you have available), then it can have a positive impact on your score. And you may see a bump in your score if your personal loan adds a new type of loan to your existing credit mix.

Alternatives to a debt consolidation personal loan

For those who aren’t convinced that a personal loan or debt consolidation loan is the best option, here are several alternatives to consider:

Balance Transfer Credit Card

A balance transfer credit card is an alternative option for those with good credit. Most balance transfer cards have an introductory 0% APR offer for some period of time, typically ranging from 12 to 21 months. The goal is to pay off your debt before the introductory period ends. Interest rates on balance transfer cards tend to be higher than those on personal loans.

Home Equity Line of Credit (HELOC) or Home Equity Loan

A HELOC and a home equity loan are loan sources secured by your home. These alternatives to debt consolidation loans generally have a much lower interest rate than a personal loan. But the danger of using a HELOC or home equity loan is that your house is on the line if you fail to make payments.

Debt Management Plan (DMP)

With the help of a non-profit credit counseling agency, you can receive direction in managing debt. A credit counselor can also help negotiate interest rates and payments with creditors, in addition to helping you understand budgeting and how to prioritize debt repayment. If a non-profit credit counselor doesn’t believe they can help you eliminate the debt entirely, they may recommend debt settlement or bankruptcy.

Debt Settlement

Debt settlement differs from debt consolidation in that you’ll attempt to get creditors to settle for less than the amount you owe. Unfortunately, this means of debt management can damage your credit score. That’s because you’ll go through a period of non-payment before negotiating a settlement amount.

Bankruptcy

Bankruptcy is often the last option to consider when it comes to consolidating debt. That’s because it will stain your credit report for up to seven to ten years. And while your debt may be forgiven, you could struggle to get back on stable financial footing.

Refinancing

Debt refinancing is similar to debt consolidation, but it’s an option to consider only for your secured debts. When you refinance, you’re essentially swapping out your existing loan for one that has a better interest rate and more favorable terms. For example, when you refinance a mortgage, you’re replacing the existing mortgage with another that hopefully has better rates.

FAQs

The average personal loan in the US is around $8,000. But borrowers with an excellent credit score could get a personal loan for up to $100,000. By shopping around and getting pre-approved, you’ll know how great a personal loan you can get before applying.
Read more

The pros of paying personal loans early include the opportunity to save money, increase your credit score, and have freedom from debt. But the cons of paying personal loans early are that you may miss investment opportunities by sending more money toward debt repayment, plus you could face early repayment penalties. So before you pay off your personal loan early, it’s best to weigh your options for that money and assess the opportunity cost.
Read more

Secured loans differ from unsecured loans in that they require some kind of collateral, such as a home or car, to back the loan. That means the lender may be more likely to issue a loan because they can access the collateral if it isn’t repaid timely. An unsecured loan relies more heavily on the borrower’s credit score to indicate risk. Borrowers with higher credit scores tend to be given the best rates for unsecured loans.
Read more

A pre-qualified person loan is when a lender reviews your eligibility criteria and issues a preliminary estimate for the loan amount and terms. Pre-qualification typically takes only minutes and doesn’t ding your credit score with a hard credit inquiry.
Read more

A personal loan for debt consolidation is a lump sum loan that offers the benefit of a fixed repayment amount. This installment loan will allow for easy budgeting, and borrowers will know exactly when the loan will be paid in full. A line of credit is a revolving debt. That means you can pay it down, then immediately use the credit you’ve freed up. This flexibility can make it challenging to repay money owed without creating larger debt in the process.