The best debt consolidation loans have a balance of low fees, competitive interest rates, and flexible terms. Here is a full list of the criteria I considered while making my picks:
Wide range of loan amounts: Some online lenders will cap their loans at relatively low amounts such as $5,000 or $10,000, shutting out potential borrowers. The best lenders will approve loans for at least $25,000 or $30,000.
Wide range of loan terms: Some online lenders are somewhat rigid on the length of loan terms they’ll offer. The best lenders are more flexible, allowing for shorter terms (such as 12 months) and longer terms (such as 72 months or more).
Competitive interest rates: Though the interest rate you can land will vary depending on your credit, the best lenders keep their range of possible rates competitive.
Reasonable fees: If the lender charges fees other than the loan’s interest rate (these include origination fees, late payment fees, and unsuccessful-payment fees), they are reasonable compared to those charged by competitors.
Transparency: Instead of immediately requiring you to input your personal information, the best lenders immediately tell you how much you can borrow, what kind of rate you might qualify for, potential terms, and fees.
Wider geographical reach: States regulate online lending differently, and it’s common for lenders to do business only in certain states. The best lenders have a wider reach than their competitors.
Credibility and reviews: I looked up online reviews and Better Business Bureau pages for each lender. I also considered how long the company has been in business.
After considering all of these criteria, Lending Club, Avant, and PersonalLoans.com rose to the top of my list. But before you take out a debt-consolidation loan with these or any other lenders, read on to make sure you know as much as possible about debt consolidation. I’ll cover the basics of debt consolidation, types of loans, how it differs from other debt-relief programs, risks, alternatives, and how to avoid scams.
What Is Debt Consolidation?
Debt consolidation is true to its name. When you consolidate your debts, you’re taking out a new, bigger loan to pay off a bunch of your existing debts. Instead of paying several different creditors, you’ll be paying a single bill for the new loan. Your monthly payment will likely be lower with the new single loan than the combined payments of your previous debts. Unlike debt settlement, you do not actually reduce the principal amount you owe — you will still be paying the full amount.
Debt consolidation is not without risks. Experts warn against consolidation unless you’re truly struggling to make minimum payments on your debts each month and are ready to turn over a new leaf with your spending habits. Here are the pros and cons of debt consolidation:
Short-term relief: A single loan with a lower interest rate, spread out over a longer term, can drastically reduce the amount you pay each month.
It’s easier to stay organized: It can be hard to keep track of several bills and monthly due dates, leading to more late or missed payments, but it’s easy to remember to pay just one bill.
No damage to your credit: Debt consolidation keeps your credit intact since you’re still paying off all of what you owe. This isn’t always the case with debt settlement, debt management plans, and bankruptcy.
Long-term pain: Your lower monthly payment is usually the result of a longer payment term, not just a lower interest rate. In other words, instead of paying a lot for a short period, you’ll be paying a little for a long period. And you might be paying much more in interest over the long run, once it’s all said and done.
Big risks, depending on your new loan: If you use a secured loan to consolidate your debts, the collateral associated with that loan (for instance, your house) will be at risk if you can’t make your new payments. Falling behind on an unsecured loan isn’t as dire, but it could still trash your credit score.
You’re fighting debt with debt: While debt consolidation can work for the fiscally disciplined, bad habits might be the reason you’re considering consolidation in the first place. If you don’t change your habits, you may end up much deeper in debt than you were before you consolidated.