Best Places to Get a Debt Consolidation Loan

If the pile of bills you’re dealing with from credit card companies has grown out of control, it might be time to consider a debt consolidation loan.

In many cases, it could be the best way to pay off what you owe while lowering the interest rate and decreasing your monthly payment.

Sound good? Of course it does!

Debt consolidation loans simplify existing debt by consolidating multiple sources of debt into a single account with one lender and one payment every month.

There are other ways to consolidate your debts – debt management programs, debt settlement, home equity or personal loans – but each one has pros and cons that may or may not make it right for your situation.

Banks? Credit unions? Online lenders?

Even if you’ve stopped using your credit card, there’s still shopping to be done if you’re considering a debt consolidation loan.

If you have an established relationship with a bank or credit union, it makes sense to look there first. The personal relationship should get you terms and conditions that, if nothing else, are a baseline to compare against other options.

But with so many other options in the marketplace, where do you go?

SoFi

Minimum credit score: 660.

Loan amounts: $5,000 to $100,000.

Loan periods: Three to seven years.

Origination fee: None.

Comment: The top lender for very good credit, low APR and no origination fees. SoFi caters to high-income consumers who are relatively new to credit. It has the feel of an elite club with social events, member dinners and an online forum for career and financial advice.

» Learn More: SoFi Reviews

Upstart

Minimum credit score: 620.

Loan amounts: $1,000 to $50,000.

Loan periods: Three or five years.

Origination fee: 1% to 6%.

Comment: Good choice for younger buyers who are having trouble getting loans due to a shorter credit history. Overall, the top lender for good credit with merit-based qualifications and flexible payment dates. Upstart will consider your alma mater, job history, major, grades and test scores when calculating APRs (from 7.37% to 29.99%). There’s no flexibility on loan periods (either three or five years).

» Learn more about: Upstart Loan Reviews

Prosper

Minimum credit score: 640.

Loan amounts: $2,000 to $35,000.

Loan periods: Three to five years.

Origination fee: 1% to 5%.

Comment: The top lender for good credit and a high debt-to-income ratio. APRs range from 5.99% to 35.99%. It has an easy-to-navigate website and flexibility (looking at non-credit history factors) when determining your APR. There are fees for late payments ($15 or 5% of the outstanding amount) and unsuccessful payment ($15 per occurrence).

» Learn More: Prosper Reviews

LendingClub

Minimum credit score: 600.

Loan amounts: $1,000 to $40,000.

Loan periods: Three to five years.

Origination fee: 1% to 6%.

Comment: The nation’s largest peer-to-peer lender is also the top lender for fair to good credit with a co-signer option. APRs range from 5.99% to 35.89%. It has a clean and transparent website with easy-to-find rates and fees. The lending process is described clearly. It usually takes a week or longer for your loan to be funded. LendingClub, available in all states except Iowa and West Virginia, charges a $7 check-processing fee every time you pay with a check. Applicants should have a relatively low debt-to-income ratio (31% or less).

» Learn More: LendingClub Reviews

Avant

Minimum credit score: 600.

Loan amounts: $1,000 to $35,000.

Loan periods: Two to five years.

Origination fee: 1.5% to 3.75%.

Comment: The best lender for fair to good credit. You can expect higher APRs, ranging from 9.95% to 35.99%. Funds are generally available by the next business day because access is through its lending platform (WebBank, an FDIC member). If you have questions, Avant offers a helpful online chat service. There’s a $25 late payment fee, but also a late-fee forgiveness program (the $25 late fee is refunded if you make three consecutive on-time payments). Avant (not available in Colorado, Iowa or West Virginia) offers perks such as access to debt management resources and regular updates on your VantageScore to track your credit repair process.

» Learn More: Avant Reviews

Peerform

Minimum credit score: 600.

Loan amounts: $1,000 to $25,000.

Loan periods: Three years.

Origination fee: 1% to 5%.

Comment: One of the best lenders for fair to poor credit. Borrowers need only one year of credit history. APRs range from 5.99% to 21.95% for debt consolidation loans. Funds are available within two weeks.

Freedom Plus

Minimum credit score: 720.

Loan amounts: Minimum of $10,000.

Loan periods: Two to five years.

Origination fee: 0% to 5%.

Comment: Best for borrowers with excellent credit. APRs begin at 4.99% (if you qualify for two rate discounts, which involve adding a co-borrower, using at last 50% of the loan to pay off creditors or having at least $40,000 in retirement savings) and run through 29.99%. You must have a phone call with the company to verify application information.

OneMain

Minimum credit score: Under 600.

Loan amounts: $1,500 to $25,000.

Loan periods: Three to five years.

Origination fee: Varies.

Comment: Designed for consumers with poor credit, offering an alternative to payday loans. The rates aren’t very competitive, but that’s the tradeoff for poor credit. You can apply online, but OneMain has nearly 1,600 branches around the country. APRs range from 17.59% to 35.99% (9.99% minimum for a secured loan).

Secured and Unsecured Debt Consolidation Loans

One of the important things to know when you’re consolidating debt, is whether you want a secured or unsecured loan.

The secured loan typically comes from the brick-and-mortar financial institutions, such as banks or credit unions. It requires collateral, such as a home or property. The collateral will reduce the interest rate on your loan, but you could lose your home or property, if you fail to make the payments.

An unsecured loan requires no collateral and is the recommended method for paying off unsecured debt like credit cards. It is available at banks and credit unions, but consumers with low incomes and credit scores, might have more luck through online debt consolidation lenders that have more flexible qualifying standards.

Whether you go the traditional route or online method, you are looking for a loan that has a lower interest rate than you are currently paying on your credit card debt. That will save you money on monthly payments and overall interest.

“If you have significant debt and are able to lower your overall interest rate, debt consolidation could be a good alternative to get your finances back in order,’’ said Mark Beyer, a Tampa-based certified financial planner for Edward Jones. “Go into it with your eyes wide open. Be sure that it’s going to put in a better place and you’re able to meet the new payment. Be sure you understand all the fees associated with the consolidating. If it checks all the boxes for your situation, it could be your ticket out of debt.’’

Debt Consolidation or Debt Management?

Some experts say consumers should first consider working with a credit counseling agency, which offers nonprofit debt consolidation in the form of a debt management program. It’s a way to pay down your outstanding debt through the agency, which works with creditors to lower your interest rates, and then distributes monthly payments to the creditors, while offering fundamental financial advice that could prevent a repeat of the problem.

The agency reduces payments to a level that will better fit your budget. Your credit-card accounts are usually frozen, giving you experience with finding ways to make it work without automatically pulling out the plastic.

“Debt management programs can be good … but learning how to stay out of debt in the first place is better,’’ said financial expert Ric Edelman, who has a nationally syndicated radio program and has written eight books on personal finance. “There are people who are spendthrifts, who are psychologically in a place where they spend money and can’t control themselves.

“But that’s rare. It’s mostly people spending money poorly who simply don’t know what they’re doing is bad. They have to be taught.’’

That’s partially the function of a debt management program. But Annamaria Lusardi, a George Washington University professor and internationally recognized expert on debt, said those fundamental concepts often are diminished by the habits of modern society.

“Everything around us is a push to buy, a push to consume and not a push to save,’’ Lusardi said. “We talk about conspicuous consumption. What about conspicuous savings? We should make saving as attractive as consumption.

“It’s exciting when money gives us the capacity to reach our dream, the capacity for financial freedom. That means you stay out of debt. And if you are in debt, you find your way out.’’

Try using Debt.org’s debt consolidation calculator to find out if consolidating your debt makes sense for you.

Advice

If debt consolidation appears to be your best choice, there are several factors to consider:

• Alternatives — Make sure you’re not bypassing an option that would actually allow you to pay less interest. Look at local credit unions, which might have lower-interest loans. Balance transfer offers — switching to credit cards with 0% APR during a 12-18 month introductory period — could allow you to make payments without accruing interest. Be careful, though. Once the introductory offer expires, you might be stuck with an astronomically high APR and much deeper debt.
• Set Up a Budget — If you’ve struggled to keep up with your bills, how are you going to make this new payment? It’s best to assess your current debt total and track your spending. Before committing to a debt consolidation plan, you should know how much you can realistically pay on your debt each month.
• Get the Best Quote — Shop around and compare a few different lenders. Most of them offer rate quotes.
• Beware of Scams — When shopping around, look for the red flags, such as ultra-aggressive sales representatives, guaranteed approvals and quick-fix promises.
• Avoid New Debt — If you erase your debt, the last thing you need is creating new debt to pay on top of your debt consolidation loan. Do not use newly cleared accounts or zero-balance credit cards to go on a shopping spree or pay household expenses.

Advantages & Disadvantages

To help gauge whether debt consolidation is the proper course for you, here are some advantages and disadvantages:

Advantages

1. Interest Savings: If you have multiple sources of debt with high APRs, a debt consolidation loan can lower the rate and save you money on total interest. Example: If you consolidate two credit card balances with APRs of 16.24% and 23.99% to a 15% APR, that’s a big savings.
2. Lower Monthly Payment: Even with a longer-term length, a debt consolidation loan could lower your monthly payment. That could keep you away from additional fees and penalty APRs that come with missing a payment.
3. Improved Credit Score: With a new loan and leaving consolidated accounts open (but unused), you will have more total credit available. That means a lower credit utilization rate and that could increase your credit score.

Disadvantages

1. More Interest: Monthly payments should be lower, but debt consolidation loans could result in more total interest being paid over the life of the loan.
2. Asset Risk: If you get a secured debt consolidation loan, you could put your house, car, retirement fund or other assets at risk. If you can’t pay off the loan, your financial outcome will be disastrous.
3. Opportunity for More Debt: After getting a debt consolidation loan, it could be tempting to make new charges on your old accounts before paying off the loan. That would create new debt — exactly what you don’t need.

Other Options

There are a few other specialized methods when it comes to debt consolidation.

Student Loan Consolidation — Federal student loan consolidation takes a weighted average of your current interest rates and combines them into a single payment with adjustable payment terms between 10 to 30 years. The process is free and sometimes allows you to retain income-based repayment or public service loan forgiveness. There’s also private student loan consolidation, which utilizes your financial and credit history to determine interest rates.

Military — Military service members and veterans can utilize cash-out home refinancing known as the Military Debt Consolidation Loan. The home equity loan allows you to pay off debt through a larger monthly mortgage payment. But it’s risky as you lose some equity and could face foreclosure if you fall behind on the loan. Active duty service members can utilize the Servicemembers Civil Relief Act, which puts a cap of 6% interest on credit cards, mortgages and other loans. It was designed to allow military members to do their jobs without worrying about serious financial consequences.

Small Business — Small business owners can consolidate business debt with a personal loan. Using personal credit history and information will be helpful because it’s often stronger than your business. But it does put personal finances at risk, so it’s not the right choice for every small business owner.