Best Debt Consolidation Loans for April 2021
|Lender||Best for||APR range||Minimum loan amount||Maximum loan amount||terms||Recommended credit score|
|LightStream||Best rate||5.95% –19.99% with automatic payment||$ 5,000||$ 100,000||24 to 84 months||680+|
|Pay||Ideal for fair credit||5.99% -24.99%||$ 5,000||$ 40,000||2-5 years||640+|
|Before||Ideal for bad credit||9.95% – 35.99%||$ 2,000 (minimums vary by state)||$ 35,000||24 to 60 months||600+|
|Best egg||Best customer reviews||5.99% -29.99%||$ 2,000||$ 35,000||36 to 60 months||640+|
|Marcus by Goldman Sachs||Ideal for good credit||6.99% –19.99%||$ 3,500||$ 40,000||36 to 72 months||660+|
|Wells fargo||Best bank||5.74% -24.49% with relationship discount||$ 3,000||$ 100,000||12 to 84 months||670+|
|Rocket loans||Ideal for quick financing||5.97% -29.99% with automatic payment||$ 2,000||$ 45,000||36 to 60 months||580+|
|Peerform||Best peer-to-peer lender||5.99% -29.99%||$ 4000||$ 25,000||36 to 60 months||600+|
Loan amounts, APR and repayment period may vary depending on the purpose or type of loan.
What is debt consolidation?
Debt consolidation is the process of combining several debts that you already owe into one new account. Once combined, you make a monthly payment to meet your total credit obligation.
The term debt consolidation can describe a few different approaches to combining debt, including:
With the two approaches above, debt consolidation can consolidate several existing financial obligations into one. Ideally, with either option, your goal should be to get a lower interest rate and better terms.
How Does Debt Consolidation Work?
In general, debt consolidation is limited to unsecured credit obligations. These can include credit cards, student loans, and not guaranteed same day loans you currently have to. Medical bills can also fall into this category. However, if you want to refinance a secured loan, such as a mortgage, you will usually need to consider different financing options.
There are a few common ways to consolidate unsecured debt. The table below provides highlights and a comparison of two of the most popular debt consolidation options.
Debt Consolidation and Your Credit
There are two main questions people usually have when considering debt consolidation options:
- How much will it cost?
- What impact will this have on my credit?
The first question can only be answered through research and rate buying. Still, it’s a little easier to explain how debt consolidation can affect your credit.
Are Debt Consolidation Loans Harming Your Credit?
Debt consolidation loans can be good for your credit scores, depending on the information in your credit reports. Credit scoring models, like FICO and VantageScore, pay special attention to the debt-to-limit ratio (aka credit utilization ratio) on your credit card accounts. When your credit reports show that you are using a higher percentage of your credit limits, your scores can suffer.
Installment accounts, like consolidation loans, do not receive the same treatment when it comes to credit scores. Imagine you owe $ 30,000 on an installment loan and $ 3,000 on a credit card with a limit of $ 3,000. Because the credit card is 100% used, it would likely have a much bigger impact (and not in a good way) on your credit scores than the $ 30,000 installment account.
When you pay revolving credit card debt With a debt consolidation loan, you can trigger a decrease in your credit utilization rate. This reduction in the use of credit could lead to an increase in the credit rating. Also, your credit scores can be affected by the number of accounts with balances on your credit report – the less the better. When you use a new loan to pay off multiple accounts at once, it could potentially give your credit scores a little boost.
Are balance transfers bad for your credit?
Opening a new credit card and using a balance transfer to pay off existing credit card debt can also lower your credit utilization rate. However, a balance transfer card is still a revolving account. A debt consolidation loan can reduce your utilization rate to 0% (if you have credit card balances). A balance transfer to a new credit card will not have the same effect.
So a credit card balance transfer could potentially improve your credit scores. But in general, paying off revolving credit cards with an installment account (i.e. a debt consolidation loan) has a chance to further improve your scores.
Is debt consolidation a good idea?
Here are some signs that consolidating your debt might be a smart financial move.
- Your monthly payments are manageable, but you can’t afford to pay off your high interest debt in full in the next few months.
- You may benefit from a lower interest rate than what you pay on your current credit obligations.
- You pay off your debts and believe that consolidation will help you eliminate outstanding balances faster.
- You have a stable income, are on a budget, and think you can avoid overspending in the future.
Only you can decide if debt consolidation is the right choice for your current financial situation. But considering some of the pros and cons of debt consolidation, your decision may be a little easier.
- Debt consolidation could reduce the amount you pay in interest. The average rate for a credit card with interest rate is 16.97%. Meanwhile, the average interest rate on a 24-month personal loan is 10.21%, according to the Federal Reserve.
- Consolidating your debt could improve your credit. When you reduce your credit utilization rate and the number of accounts with balances on your credit reports, your credit scores can benefit.
- You only need to make one monthly payment to your new lender. It’s easier to manage than multiple payments to different accounts.
- Debt consolidation does not erase your debt. You’ll need to follow a budget and avoid overspending if you want your new consolidation loan (or balance transfer card) to permanently eliminate your debt.
- If you have credit or income problems, you may have difficulty obtaining a lower interest rate. There is usually no point in consolidating your debt if a new loan or balance transfer doesn’t save you money.
At the end of the line
A debt consolidation loan has the potential to help you improve your financial life. But whether a debt consolidation loan ultimately helps or hurts you, it depends on how you handle the account and your finances as a whole.
Most importantly, avoid the temptation to charge new balances on your recently paid off credit cards. If you load new balances on the original accounts, you could be setting yourself up for financial disaster in the future.
How we chose the best debt consolidation loans
Investopedia is dedicated to providing consumers with unbiased and comprehensive ratings of personal lenders for all borrowing needs. We collected over twenty-five data points from over fifty lenders, including interest rates, fees, loan amounts, and repayment terms to ensure our content helps users take the good borrowing decision for their needs.
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