The Best Debt Consolidation Loan Rates for 2024

Compare debt consolidation solutions. Is a personal loan for debt consolidation right for you?
Written by Gina Pogol
Financial Expert
Managing Editor
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debt consolidation loan

If a personal loan for debt consolidation is right for you, there are several ways to do it. One option is a personal loan for debt consolidation. If you consolidate debt with a personal loan, you can put an expiration date on your debt, improve your credit score, and work toward financial security.

What Is a Debt Consolidation Loan?

If your credit cards are maxed out, you have too many accounts with balances, or you’d just like to pay a lower interest rate, a credit card debt consolidation loan might be right for you. Debt consolidation with a personal loan offers a few advantages:

  • Fixed interest rate and payment.
  • Make payments on multiple accounts with one payment.
  • Repay your balance in a set amount of time.
  • Personal loan debt consolidation loan rates are typically lower than credit card rates.
  • Lower credit card balances can increase your credit score quickly.

Credit cards can be hard to pay off if you only make minimum payments. Consumers often get too comfortable just making the minimum payments on their credit cards, but this does little to pay down the balance. In fact, making only the minimum payment can cause your credit card debt to hang around for decades, even if you stop using the card.

If you owe $10,000 on a credit card, pay the average credit card rate of 17%, and make a minimum payment of $200, it would take 88 months to pay it off. In the end, you would have paid over $7,500 in interest.

Contrast that with a debt consolidation loan. With a debt consolidation loan rate of 10% and a five-year term, your payment only increases by $12, but you’ll be free of your debt in 60 months and pay just $2,748 in interest.

You can use a personal loan calculator to see what payments and interest might look like for your debt consolidation loan.

Which Lenders Have the Best Personal Loan Rates?

Finding the right lender could help you save hundreds or even thousands of dollars. The rate you receive on your personal loan depends on many factors, including your credit score and income. The smartest way to know if you’re getting the best loan rate is to compare offers from competing lenders.

Which Lenders Have the Best Debt Consolidation Loan Rates?

The rate you receive on your debt consolidation loan depends on many factors, including your credit score and income. The smartest way to know if you’re getting the best loan rate is to compare offers from competing lenders.

Is Debt Consolidation Right for You?

Debt consolidation with a personal loan may be right for you if you meet these requirements:

  • You are disciplined enough to stop carrying balances on your credit cards.
  • Your personal loan interest rate will be lower than your credit card interest rate.
  • You can afford the personal loan payment.

If all of those things don’t apply to you, you may need to look for alternative ways to consolidate your debt.

Debt Consolidation Drawbacks

Not everyone is a good candidate for a credit card debt consolidation loan. In some cases, it can make a debt problem worse. Before consolidating debt with a personal loan, consider if one of the following scenarios applies to you.

You can’t stop using your credit cards

You know yourself. If you are not 100% sure of your ability to leave your credit cards alone once you pay them off, don’t consolidate debt with a personal loan.

You may benefit from credit counseling with a reputable non-profit association, and perhaps a debt management plan.

Your debt consolidation personal loan interest rate won’t be lower

Personal loan interest rates average about 7% lower than credit cards for the same borrower. But if your credit rating has suffered since getting the cards, you may not be able to get a better interest rate. You may want to work with a credit counselor in that case.

If you have credit cards with low or even 0% introductory interest rates, it would be silly to replace them with a more expensive loan. However, some accounts offering zero interest also have a clause that allows the creditor to charge you a high-interest rate back to day one if you don’t pay off the balance before an established deadline. In that case, you may want to use a credit card debt consolidation loan to pay it off before the penalty rate kicks in.

You can’t afford the personal loan payment

If you are just squeaking by making the minimum payment on a fistful of credit cards, you may not be able to lower your payment with a personal loan. That’s because many credit card issuers set a very low minimum payment on the account. This maximizes their revenue as long as you make the minimum payment.

A personal loan is designed to be paid off after a specific number of months. That could increase your payment even if your interest rate drops.

Alternatives to a Personal Loan for Debt Consolidation

For those who can’t benefit from a debt consolidation loan, there are options. Here they are from least drastic to most drastic.

1. Consolidate debt with a balance transfer credit card

If you can clear your debt in fewer than 18 months or so, a balance transfer credit card could offer a faster and cheaper alternative to a personal loan. Consumers with excellent credit can get up to 18 months interest-free. The transfer charge is normally about 3%. Make sure that you clear your balance in time, however. Many issuers charge deferred interest all the way back to Day One if you don’t pay the account off during the zero-interest period.

2. Consolidate with a home equity loan

If a debt consolidation payment is too high, one way to lower it is to stretch out the repayment term. One way to do that is through a home equity loan. This fixed-rate loan can have a 15- or even 20-year term and the interest rate is very low. That’s because the loan is secured by your house. You are essentially trading an unsecured debt with a secured one, so you’ll need to have a steady, reliable income to ensure you can pay off a home equity loan.

Here’s a comparison:

  • A $5,000 personal loan for debt consolidation with a five-year term and a 10% interest rate has a $106 payment.
  • A 15-year, 7% interest rate second mortgage for $5,000 has a $45 payment.

Here’s the catch:

  • The total interest cost of the five-year loan is $1,374.
  • The 15-year loan interest cost is $3,089.

In addition, second mortgages often have higher fees and setup costs. But if you really need to lower your payments, a second mortgage is a good option.

3. Debt management plan

A debt management plan, or DMP, is a program under which you make a single monthly payment to a credit counselor or debt management specialist. These firms often provide credit counseling and budgeting advice as well. And they can often negotiate lower interest rates and payments from your credit card issuers.

When you enter into a plan, understand how much of what you pay each month will go to your creditors and how much will go to the company. Find out how long it will take to become debt-free and make sure you can afford the payment.

4. Chapter 13 bankruptcy

Chapter 13 bankruptcy is a debt management plan. However, Chapter 13 filings create public records, so it’s not private. One advantage is that with Chapter 13, your creditors have to participate. They can’t opt out the way they can with debt management or settlement plans. Once you file bankruptcy, the bankruptcy trustee determines what you can realistically afford and sets your monthly payment. The trustee distributes your payment among your creditors. In five years, any remaining debt is discharged. Discharged amounts are not taxable income.

5. Debt settlement

Debt settlement, if successful, can unload your account balances, collections, and other unsecured debt for less than you owe. You generally offer a lump sum and ask the creditor to accept it as payment-in-full and write off the remaining unpaid balance.

If you are very a very good negotiator, you can pay about 50 cents on the dollar and come out with the debt reported “paid as agreed” on your credit history. But you’ll most likely get, “account settled for less than the amount owed.” In addition to a slew of missed payments. That is very bad for your credit history and score. Any amounts forgiven by your creditors are subject to income taxes.

6. Chapter 7 bankruptcy

Chapter 7 bankruptcy is the legal, public version of debt settlement. As with a Chapter 13 bankruptcy, your creditors must participate. Chapter 7 bankruptcy is for those who can’t afford to make any payment to reduce what they owe. You must pass a “means test” and prove your insolvency to qualify for Chapter 7 bankruptcy.

The disadvantage of Chapter 7 bankruptcy is that your possessions must be sold to satisfy your creditors. Debt settlement allows you to keep all of your possessions. You just offer money to your creditors, and if they agree to take it, your possessions are safe. With bankruptcy, discharged debt is not taxable income.

Keys to Successful Debt Consolidation

Consolidating debt with a personal loan can be smart. You can save money and improve your credit rating. Follow these tips to ensure a successful debt repayment:

  • Find a personal loan with a lower interest rate than you’re currently paying.
  • Make sure that you can afford the payment. Sometimes, to repay debt quickly, your payment must increase.
  • Consider combining a personal loan with a zero-interest balance transfer card.
  • Control your spending, or get professional counseling.
  • Stop using your credit cards and stop carrying balances.

The worst thing you can do is run up your credit cards again once the balances are zeroed out. The most important thing to remember about consolidating debt with a personal loan is that you still owe the money. Moving debt from credit cards to a personal loan does not make it magically disappear. But stick with your repayment schedule, refrain from using your cards, and watch your balance disappear in time.

Frequently Asked Questions

How do I qualify for a debt consolidation loan?

You need to have a measurable, provable income to show that you can pay back the loan. For some lenders, a borrower’s income doesn’t necessarily need to be from a job, it could be from other sources such as child support or alimony. People currently in bankruptcy proceedings can’t take on any new debts, including a debt consolidation loan.

What credit score do I need for a debt consolidation loan?

To get a low-interest debt consolidation loan, you should have good credit. The good news is, even if your credit is less than stellar, even if it’s fair or borderline bad credit, you can get a debt consolidation loan with bad credit. The only issue is that the loan amounts for bad credit tend to be smaller than ones for good credit borrowers, so you may run into an issue where the amount of loan you qualify for may not be enough to cover all of your debt.

How will a debt consolidation loan affect my credit score?

Your credit may take a temporary hit of a few points by having a credit check done, but this would be similar to any credit you would apply for. As long as you make your payments on time and pay your debt consolidation loan according to your agreement, your credit score will not be affected negatively, and it may even help bring your credit score up. If you decide to close credit card accounts that you pay off with your debt consolidation loan, you’ll need to determine the best way to do this in order to not lower your credit score. The fact that you’ve taken out a loan for debt consolidation as a lone factor will not hurt your credit.

Can a personal loan for debt consolidation save me money?

If you are paying high interest on several credit cards and having a hard time making payments on your credit card and other debts, putting those debts into a low-interest debt consolidation loan can save you money. With credit cards, it’s hard to know when you’ll be done paying them off if you’re only making minimum payments, but with a debt consolidation loan, you’ll know exactly when the loan will be paid off.

How can I choose a debt consolidation loan?

If you have good credit, a good income, and have been at your job for a few years or longer, you will probably have your pick of several loans and can choose one that offers the best interest rate and the lowest loan origination fees. On the other hand, if your credit is fair or poor or your income is limited, you may have fewer options and may pay a higher interest rate. This doesn’t mean it’s not a good loan, it just means that you will need to choose a loan based on your individual circumstances.

About Author
Gina Pogol
Gina Freeman writes about personal finance and has been featured on MoneyRates, The Mortgage Reports, MSNMoney, Fox Business, Forbes, The Motley Fool, and other fine websites. Her background includes tax accounting with Deloitte, over 20 years in mortgage sales and underwriting, systems consulting for Experian, and several years in bankruptcy law. Gina enjoys helping consumers make confident and intelligent financial decisions.
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