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 to Get a Debt Consolidation Loan
To get a personal loan for debt consolidation, most lenders require you to be at least 18 years old and have legal proof of residence in the United States. You’ll also need a verifiable bank account that’s in good standing, i.e., not in foreclosure or bankruptcy.
Debt-to-income (DTI) ratio is also a factor. Most lenders require a DTI of 40% or lower for borrowers to qualify for a debt consolidation loan.
If you have poor credit, your interest rate could be even higher than the annual percentage rate (APR) on your existing debt.
Regardless of your credit score, checking your credit report can be beneficial 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
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|
Note: Data as of May 18, 2020.
Debt Consolidation Loans vs. Balance Transfer Credit Cards
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.
Personal loans usually have a higher borrowing limit than balance transfer cards. Some top out at $100,000 compared with a maximum of about $15,000 on most balance transfer cards.
Fixed payments on a personal loan will also keep you on schedule to pay off your debt. If you continue to make transactions on a balance transfer card, your debt will continue to grow.
Personal loan balances are considered installment debt, while a balance transfer card is revolving debt. The two are treated differently in credit reports. Payment history and credit utilization, or the amount you owe, are the two biggest factors when it comes to credit cards. Payment history alone is the biggest factor in installment debt.
When is Debt Consolidation a Good Idea?
Debt Consolidation is a Good Idea When:
- You have a good credit score and strong DTI
- You can lower your interest rates
- You can afford to make your new payments every month
Debt Consolidation is a Bad Idea When:
- You have bad credit and a weak DTI
- You can pay off a small balance within a year
- You can’t afford the monthly payments with the amount you owe
Benefits of debt consolidation
There are several advantages to debt consolidation loans.
Simplify monthly payments
A debt consolidation loan eliminates multiple creditors so you only make payments to a single lender. This helps to avoid late and missed payments.
Fixed interest rates
Credit cards can have variable interest rates, meaning they can change over time. With a debt consolidation loan, the interest rate is fixed for the duration of the loan.
The interest rate will be determined by your credit score, the length of the loan, and the amount you borrow. Generally, the better your credit score, the better your interest rate.
Can I borrow more?
Loan amounts vary by lender, but some debt consolidation loans have a maximum of $100,000. Most consumers consolidate much less debt. According to a recent U.S. News survey, 60% of consumers consolidated less than $20,000.2
Finding the Right Lender
Comparing lenders is key to discovering which is the best pick for your individual needs. Check out our personal loan reviews to get an idea of the right lender for you.