We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free – so that you can make financial decisions with confidence. The offers that appear on this site are from companies from which TheSimpleDollar.com receives compensation. This compensation may impact how and where products appear on this site including, for example, the order in which they appear. The Simple Dollar does not include all card/financial services companies or all card/financial services offers available in the marketplace. The Simple Dollar has partnerships with issuers including, but not limited to, Capital One, Chase & Discover. View our full advertiser disclosure to learn more.
Best Debt Consolidation Loans for January 2021
We use our proprietary SimpleScore methodology to weigh your available options and find the very best lenders for easy consolidation loans that will eliminate your debt with the lowest rates.
The best debt consolidation loans of 2021
- Best for Joint Borrowers: LendingClub
- Best Peer-to-Peer Lender: Prosper
- Best Bad Credit Marketplace: PersonalLoans.com
- Best Debt Consolidation Lender for Great Credit: LightStream
- Best Debt Consolidation Lender for Average Credit: Avant
- Best Credit Health Tools: Upstart
- Best Debt Consolidation Lender for Poor Credit: OneMain
- Best for High-Income Earners: Best Egg
Debt consolidation loans at a glance
|LendingClub||10.68%–35.89%||$1,000–$40,000||3–5 years||Origination and late fee|
|Prosper||7.95%–35.99%||$2,000–$40,000||3–5 years||2.4%–5% origination fee|
|PersonalLoans.com||5.99%–35.99%||$1,000–$35,000||90 days–6 years||Varies by lender|
|LightStream||2.99%–20.49% w/out Autopay||$5,000–$100,000||24–144 months||No fees|
|Avant||9.95%–35.99%||$2,000–$35,000||2–5 years||Administrative fee: 4.75%|
|Upstart||8.41%–35.99%||$1,000–$50,000||3–5 years||Origination and late fee|
|OneMain||18%–35.99%||$1,500–$20,000||2–5 years||Origination and late fee|
|Best Egg||5.99%–29.99%||$2,000–$35,000||3–5 years||Origination and late fee|
*Rates accurate as of December 2020
What is a debt consolidation loan?
It is all too easy to fall down the rabbit hole of debt. One debt becomes another and then another, and before you know it, you are so buried in debt that you don’t see the way out. When your debt grows wildly out of control, a debt consolidation loan can be a great solution to resolve your debt in one fell swoop. By taking out one big loan, you can pay off all of your existing debts and only have to worry about one loan going forward. A debt consolidation loan can also reduce the amount you pay each month and also shorten the total length of your financial obligations, so you get out of debt that much faster.
When does a debt consolidation loan make sense?
A debt consolidation loan doesn’t make sense for everyone. But how do you know if it’s right for you? Here are some reasons why a debt consolidation loan might make sense:
- You’re having a hard time keeping track of each bill’s due date, risking late fees and penalties
- You have several high-interest credit cards or loans you’re struggling to pay minimums on
- Your debt is split between several variable interest loans or credit cards
A debt consolidation loan can be easier to manage, with just one payment due a month. These types of personal loans come with fixed interest rates, which can be lower than your current interest rate, depending on credit score.
It makes sense to take out a debt consolidation loan if you:
- Can get a better interest rate than you currently have on your outstanding debt
- Don’t plan to take on more debt while repaying your existing debt
- Understand the fees and payment terms associated with the loan
- Are going to save money by consolidating versus paying each one off individually
- Know you can easily pay on time each month until the loan is paid in full
[ Next: Here’s the Average Debt in Every State ]
How debt consolidation loans work
When you have bad credit, you face far higher interest rates than if you have good credit. A debt consolidation loan is a personal loan that gives you a large sum upfront that you use to pay off your debt. From there, you only have to repay your loan for an easier, more convenient way to eliminate your debt. It can also restore your credit that much faster because there are not multiple debts being reported to the credit bureaus each month. Your new debt consolidation loan should offer a lower interest rate than those associated with your outstanding debt. Debt consolidation lenders use FICO scoring to approve or deny your loan, and while there are lenders who work with bad credit, you will have far more options available to you when you have excellent credit.
Debt consolidation is a useful financial tool that consumers can use to help them overcome credit card debt, student loan obligations and other financial liabilities.
Usually when you consolidate your debt with a debt consolidation loan, you agree to new terms, new interest rates and hopefully a shorter path to becoming debt-free. There are plenty of different types of debt consolidation loans, which will help borrowers with multiple types of debt.
Debt consolidation loans
Debt consolidation loans are a common offering from traditional banks and the newer peer-to-peer lenders. It is an accepted way for consumers to manage their debts that have either grown to large or simply have too many lenders. They are specifically designed to pay down multiple high-interest debt obligations.
One way to consolidate credit card debt is to transfer it all to a single new credit card. Typically this new credit card offers low or no interest for a period of time. This is most effective if the credit card debt can then be paid off before the lowered interest rate on the new card expires.
Home equity loans
A home equity loan or home equity lines of credit are both excellent ways for homeowners to consolidate high interest debt since the interest rate is typically much lower than other loans. Another benefit of these types of loans is that the interest is tax deductible, which offers additional savings.
Student loan consolidation
There are federal student loan consolidation options through the Federal Direct Loan Program. These loans consolidate federal student loan debt and the new interest rate is a weighted average of the prior loans. This type of loan is not available for private loans, but there are a number of lenders that offer student loan refinancing.
What you need to apply for a debt consolidation loan
The first step to take before applying for any debt consolidation loan will be to pull a copy of your credit report to see where you stand with your credit score and your total debt picture. With that information you can get an idea of which lenders you can approach for a debt consolidation loan, and which would be a waste of your time. You need to ensure you have the creditworthiness and income to qualify for a loan, particularly if you are applying to a new lender.
And of course you want to make sure you will have the necessary income to commit to whatever repayment terms come with the debt consolidation loan.
The documentation you’ll need is going to depend on the lender and your credit history, but you can expect the lender will require the following common information:
- Bank statement or recent paystubs
- Employment verification
- Government-issued identification or passport
- The 10-day payoff amount for your loans, if applicable
- The most recent credit card statements for your accounts, if applicable
- Letters from creditors or repayment agencies, if applicable
What to do before applying for a debt consolidation loan
If you’ve determined that a debt consolidation loan makes sense for your financial situation, there are some things to do before applying for a debt consolidation loan:
- Check your credit score. By checking your score, you can get an idea of how good (or bad) your credit standing is. This can prepare you for a range of interest rates you’re eligible for when applying for the loan.
- Know what you owe. Gather all your outstanding debts and list out who you owe, how much and the interest you’re paying. Doing this before you apply will make the application process easier and faster.
- Don’t take on more debt. This can be harder for some than others, but you have to stop taking on more debt until you get your current debt under control.
- Commit to a plan. Debt consolidation loans have a specified amount of time to repay your debt in full. Check your budget and determine how much you can set aside to go towards your debt. Stay committed to your plan so you can come out the other side debt-free.
[ More: 11 Ways to Get Out of Debt Faster ]
Average debt consolidation loan rates
As of October 2020, consumer loan rates are down about 2% compared to the previous year — showing about 9.34% for a 24-month personal loan according to the Federal Reserve.
Lower interest rates offer a great opportunity for consumers who are trying to pay off debt. By consolidating your debt into a single, low-interest loan, you can pay it off quickly and improve your credit score. Debt consolidation loans are great for paying off credit debt, installment loans, student loans and more. Unfortunately, the lower rates also mean lending is highly competitive, and it’s less easy for consumers with poor credit to secure new loans.
[ Read: Best Personal Loans for ]
States where people have the most debt
Sometimes it can feel very lonely being in debt. You think you’re the only one, you may be embarrassed or angry about your situation, expecting that no one else understands what you’re going through.
In reality, many people are in various stages of debt. It happens in every state across the country, and some states have higher debt-to-income ratios than others.
We pulled the available Q4 2019 data from the Federal Reserve to research the average household debt in each state. These are the top 10 states with the highest average household debt.
- Washington, D.C.: 88,450
- Hawaii: $74,230
- Colorado: $73,890
- California: $73,400
- Maryland: $72,310
- Washington: $67,440
- Virginia: $66,140
- Massachusetts: $65,500
- Utah: $62,090
- Connecticut: $59,840
Depending on how much debt you have, it can be overwhelming, and you may feel there is no end in sight. There are benefits to getting a debt consolidation loan to help you get out of the debt you’re dealing with right now.
[ Read: What Is Debt Consolidation? ]
Impact of COVID-19 on debt consolidation loans
The COVID-19 pandemic caused financial hardship for many families due to job layoffs and higher unemployment rates. Since the federal stimulus ended in July 2020, many consumers are looking for new options to help pay off debt. During this time, lenders are less likely to take on more risky borrowers, which may make it more difficult to find a debt consolidation loan. Yet, the Federal Reserve has set lower interest rates to help improve access to funds for more consumers. If you can secure a debt consolidation loan, it’s a great time to work on lowering your debt.
Pros and cons of debt consolidation loans
|Single monthly payment|
Helps improve credit quickly
One interest rate on debt
|May be subject to higher interest rates |
Hard credit check may apply
New origination or application fees apply
Benefits of debt consolidation
- Payments are easier. With a debt consolidation loan, you only have one payment due date to worry about, so you don’t have to fear a missed payment.
- Lower interest rate. Credit cards almost always have higher interest rates than personal and debt consolidation loans, depending on your credit score. The lower rate may save money in the long run or help you pay off your debt quicker.
- Less stress and anxiety. Consolidating your debt can feel like a breath of fresh air, knowing you only have one bill to pay. Taking control of your finances with predictable, manageable payments can be a huge stress and anxiety reliever.
- Pay it off faster. Using a debt consolidation loan, you may be able to accelerate your payments, paying it off much faster than you could have before. Just watch for any prepayment penalties.
[ More: Best Credit Repair Companies ]
Making the most of your debt consolidation loan
People who want to get out of debt faster or even just simplify their bills can benefit from debt consolidation. Whenever considering consolidating debt, it’s also important to remember not to take on additional debt. This is especially important with credit card debt consolidation — once you have the balance paid off via a consolidation loan, it’s important to not run up your credit card with charges while you make payments on your new loan.
Basically there’s no one-size-fits-all plan for debt consolidation loans. You need to find the best option for your circumstances by first deciding what you need to accomplish with the loan, whether that’s consolidating a large amount of debt, finding the lowest interest rate, low or no fees, fast funding or different repayment terms.
Many people begin to feel a sense of relief once they consolidate debts, but it’s important to remember that you aren’t out of the woods until the consolidation loan is paid off. It’s good to know there’s an end date to the payments, but in the meantime it’s important to manage your spending and make sure you’re making payments on time.
Debt consolidation loan vs. balance transfer credit card
Two of the most common debt consolidation strategies used to lower interest rates while paying debt off more quickly are debt consolidation loans and balance transfer credit cards.
The key point between using one or the other is often how many debts are being consolidated. If it is only a couple high-interest credit cards then a balance transfer strategy makes more sense, but for a larger number of loans or higher balances a debt consolidation loan is often the better strategy.
A balance transfer is when high-interest credit card debt is transferred to a new credit card featuring a 0% interest rate for usually six, 12 or 18 months.
A debt consolidation loan, by contrast, takes all outstanding debts and rolls them into one larger loan, typically with a smaller monthly payment, although sometimes the length of the loan is more important. These consolidation loans often have much lower interest rates when compared with credit cards, allowing borrowers to save considerably over the life of the loan. Using either method to consolidate debt is an effective strategy in corralling debt and paying it off. However debt consolidation does not address the spending habits that led to this place.
Consumers need to establish a realistic budget to avoid running up additional debts after using a debt consolidation strategy. Otherwise the consolidation loan is for naught and you’ll end up even further in debt than before.
How to get a debt consolidation loan
Many lenders will allow you to prequalify using a soft credit check that won’t ding your credit. This will help you get a general idea of how much you can qualify for, as well as some of the other details regarding that particular lender’s loan. Every loan is different with its options; while many loans have terms of three to five years, you will find some lenders who offer shorter or longer terms. How much you can borrow will also depend on each lender, so if you are looking for a larger loan, you may not have as many options as if you were looking for a $5,000 loan. Fees are another area where lenders can vary; while some loans may carry steep origination fees or prepayment penalties, others may feature significantly lower fees or none altogether. The difference can amount to thousands of dollars over the life of your loan.
How to consolidate debt with bad credit
- Pull your credit reports. Get copies of your credit scores to help you understand which lenders will or won’t accept your application. If possible, take the time to improve your credit score to open yourself to more lending opportunities.
- Compare lenders. Research bad credit lenders that offer solutions to consumers with poor credit, such as online lenders and credit unions. Check your rates with each lender using a soft credit inquiry to see what interest rates, loan amounts and fees will apply to your loan.
- Apply for the loan. Once you’ve checked your rates with multiple lenders, move forward with the application process for the best bad credit debt consolidation lender that offered favorable rates and fees. You’ll have to provide personal information, your Social Security number and contact info during the application. When it’s approved, review the paperwork carefully and sign the loan agreement when you’re ready.
- Continue making payment to previous creditors. Although your new loan is approved, you will have to continue making payments to all your previous creditors — credit card issuers, lenders and more — until the loan amount is approved and you can send it to your creditors or until your new lender sends the money to them on your behalf.
- Start making payments to your new lender. Once your previous creditors have been paid, you can start making payments to your new lender. Make sure to pay on time every month and you will start to see your credit improve with each on-time payment.
How to choose the best debt consolidation loan for you
- Prepare your finances. Before you apply for a debt consolidation loan, it’s a great idea to comb through your credit report. Repaying your smaller debts can improve your credit score and allow for a much lower interest rate on your loan. You should also take this time to resolve any late payments so you borrow as little as possible for your debt consolidation loan.
- Itemize your debts. Before you can apply for a loan, you need to figure out how money you actually need. Create a detailed list of all of your debts and calculate the total to calculate the total for your loan.
- Consider your lender. While banks are the most traditional type of lender for a debt consolidation, they are far from your only choice. There are also online-based lenders who can provide faster, more efficient service, and credit unions can use their not-for-profit state to cater to those who struggle with their credit.
- Shop your options. It is important to still shop your options, even if you find that you prefer one kind of lender over another. You may be surprised by the rates that you find. The difference of just a few points can make an enormous difference in how much the loan will cost you, and you can save a ton of money if you can find a lender with low or no fees.
- Apply for a loan. There are certain things you will need to provide when you apply for a loan. Be prepared to provide personal identification and information regarding your employment. You may also have the option to add a co-signer to your loan so you can qualify for better rates.
Alternatives to debt consolidation loans
A debt consolidation loan is not your only option. You can pay off your debts using a few different methods. These may take longer but will cost far less than the interest that would accompany an installment debt consolidation loan.
These are some popular alternatives to debt consolidation loans.
- Snowball method. If you want to pay down your debt yourself, the snowball method is a great way to tackle your debt. This means that you begin working from the smallest debt to the biggest. Once you pay off the smallest debt, you take the money you would pay on it each month and apply it to the next debt, gradually increasing the amount you’re paying on each debt as the previous one is wiped.
- Avalanche method. If you will sleep better knowing that your biggest debts are paid, you may want to use the avalanche method. This method involves paying off the loans with the highest interest first, so you tackle the largest, fastest-growing debt before it balloons out of control. Financially this is the most logical method for paying down debts. By tackling the debts with the highest interest rate you can substantially slow down the growth of your debt and begin paying down the principal amounts much faster.
- Budgeting. Sometimes, all it takes is a little organization. If you feel that your debt is manageable, you could benefit from reorganizing your budget. Changing the way that you spend your money and tackle your debt could be all the change you need to eliminate your debt and get back on track. If you don’t have a budget, starting one might be the first step to a newfound sense of financial freedom. If you already have a budget, reorganizing is something you should be doing anyway to keep spending in check and ensure you’re allocating your income effectively.
- Balance transfer cards. A balance transfer involves transferring existing debt to a new credit card, usually one with a lower rate, or even an introductory 0% rate. Using this method can be a good alternative if you will be able to pay off the debt before the introductory rate expires. It’s also important that you stop adding to your credit card debt once you transfer to the new card otherwise you could find yourself in even worse shape.
We welcome your feedback on this article and would love to hear about your experience with the debt consolidation loans we recommend. Contact us at email@example.com with comments or questions.