Best Debt Consolidation
Debt consolidation loans allow individuals to combine multiple debts into one fixed-rate loan, with potential interest savings and simplified payments. However, they may have qualification challenges and don’t eliminate the original debt.
Written by
Matthew Levy
After graduating with a Bachelor of Science in Economics from the University of Victoria in 2010, Matthew developed a passion for helping clients meet their financial freedom through strong, risk-adjusted portfolios. Matthew also undertook and completed his CFA® charter in 2015, a rigorous professional credential program promoting the highest standards of education, ethics, and professional excellence in the investment profession.
Last Update on Sep 27, 2023
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Selecting An Optimal Debt Consolidation Loan
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Achieve is an indirect lending platform providing personal loans. Since its establishment in 2014, Achieve has been recognized for its debt consolidation loans, largely due to adaptive loan terms between two and five years and offering loan amounts from $7,500 to $40,000.
Pros:
- Rapid access to funds, usually within 48 hours
- Flexible repayment terms to accommodate many financial situations
- Open to co-borrowers, enhancing the likelihood of loan approval
Cons:
- The application process is not fully digital
- Enforces a minimum income criterion
- Sets a relatively high minimum loan value
Additional Details
Fees and Costs:
Achieve’s APR ranges from 7.99% to 29.99%, and there is likely an origination fee between 1.99% and 4.99% of the loan amount.
Loan Parameters:
Varying amounts are available from $7,500 to $40,000, with two to five years term. The minimum credit score for eligibility is set at 620, and there is also a cap that Achieve sets for its lending, ensuring it doesn’t exceed 35% of the borrower’s annual earnings.
Additional Features:
Achieve stands out with its direct payments to creditors, with a preference for borrowers who can dedicate a significant portion of their loan for debt consolidation. There are also quick loan approvals, with potentially same-day disbursement, and fund transfers usually happen within 48 hours. For those with low credit scores, it is possible to have co-signers and co-applicants.
Discover Loans
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Why we picked it?
Discover is known for its banking, credit card, and retirement solutions, but it also offers personal loans across all 50 states. Loans can be acquired for as low as $2,500 up to $40,000, with terms of up to 7 years to reduce monthly repayment amounts. While there is a fee for late payments, Discover does not have origination fees or prepayment penalties. Discover also has an efficient online application, mobile banking tools, strong customer support, and expedited funding processes.
Pros:
- Option for direct payment to creditors
- No origination fees or prepayment penalties
Cons:
- Charges for late payments
- Relatively low maximum loan amount
Additional Details
Fees and Costs:
Discover’s APR ranges from 7.99% to 24.99%. While they have a late payment fee, they exclude origination fees and prepayment penalties from their terms.
Loan Parameters:
Loans vary from $2,500 to $40,000, with durations of up to 7 years. Credit scores usually need to meet the minimum of 660, but the average borrower at Discover has a credit score of 750. While there isn’t a minimum credit history duration, applications should have a minimum annual household income of $25,000. Co-signers or co-applicants are not accepted.
Additional Features:
Discover loans can serve various personal needs, like debt consolidation or even small-business expenses. However, they can’t be used for post-secondary education fees or paying off secured loans. They have a rapid processing time, with borrowers typically receiving a decision within 1 business day and funding within 7 business days, although normally much faster. If using debt consolidation, Discover facilitates direct transfers to third-party creditors.
Upgrade
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Why we picked it?
Upgrade has been around since 2017, and has expanded its online and mobile credit services, with over $3 billion in credit facilitated to an excess of 10 million applicants. The platform provides loans to those with poor credit histories and offers the benefit of directly paying other creditors for debt consolidation. While the interest rates can be high, loan amounts are flexible from $1,000 to $50,000, with 2 to 7 years terms.
Pros:
- Lower credit score threshold
- Loans can be used for business expenses
- Offers direct lender payoff for debt consolidation loans
Cons:
- Elevated APR range
- Has origination, late payment, and NSF fees.
Additional Details
Fees and Costs:
Upgrade’s APR varies between 8.49% and 35.99%. They charge an origination fee of 1.85% to 9.99% and also have fees for late payments and insufficient funds.
Loan Parameters:
Loans from Upgrade can be from $1,000 to $50,000 with durations between 2 and 7 years. The entry credit score requirement is 580, making it attractive for those with fair credit. There’s also no minimum income threshold for applicants, although the average borrower has an income exceeding $95,000 annually. Both co-signers and co-borrowers are allowed.
Additional Features:
Upgrade loans have varied uses, including debt consolidation, credit card payoffs, home improvements, and other significant expenses. They also offer direct payment to third-party creditors. However, the turnaround time on loans post-approval is up to 4 business days, and direct payments to third-party lenders usually extend the clearance time – up to two weeks.
Universal Credit
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Why we picked it?
Universal Credit operates as an online lending platform with personal loans ranging from $1,000 to $50,000 through its partners, with 3 to 7 years repayment terms. It does champion accessibility even for those with compromised credit, but borrowers need to be cautious. The platform has high APRs and implements an origination fee of 5.25% to 9.99% on all loans.
Pros:
- Flexible eligibility criteria
- Next-day funding availability
- Absence of prepayment penalties
Cons:
- Elevated APRs
- Origination fees of 5.25% to 9.99%
Additional Details
Fees and Costs:
Universal Credit’s APR varies from 11.69% to 35.99%, with an origination fee of 5.25% to 9.99% on all loans.
Loan Parameters:
The loans offered range from $1,000 to $50,000, and have a duration between 3 to 7 years. They do welcome applicants with a minimum credit score of 580.
Additional Features:
Once approved, funds typically reach the recipient’s bank account within a single business day. However, this is contingent on the bank’s processing speed as well. Direct payments to other creditors may lengthen the process up to two weeks.
Happy Money
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Why we picked it?
Happy Money was first established in 2009 as Payoff and is an online lending platform focusing on credit card debt consolidation. It operates in 46 states and directly settles members’ outstanding credit card balances for you. With loan amounts from $5,000 to $40,000, Happy Money caters to many needs, with durations from 2 to 5 years. An origination fee of up to 5% may be charged, but borrowers do not need to worry about late, annual, or prepayment fees.
Pros:
- Direct payments to external creditors
- Attractive APRs
- Offers financial wellness through its “Peace” program
Cons:
- Possible origination fees
- Restricted repayment terms
- A three-year minimum credit history requirement
Additional Details
Fees and Costs:
Happy Money’s APR stands between 11.25% and 29.99%, although an origination fee of up to 5% may be charged.
Loan Parameters:
Loans vary between $5,000 and $40,000 with 2 to 5 years durations. They seek applicants with a credit score of at least 640, but average applicants have a score of 705.
Additional Features:
Eligibility requires a minimum credit history of 3 years, no existing delinquencies, and a debt-to-income ratio below 50%. While there isn’t a minimum income prerequisite, they do not support co-signers or co-applicants. They specialize in credit card debt consolidation.
Best Egg
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Why we picked it?
Best Egg is backed by Cross River Bank and extends personal loan services to 46 states. They offer loans from $2,000 up to $50,000 with terms of 3 to 5 years, making a strong choice for debt consolidation. There are no prepayment penalties, but they do not facilitate direct payment to third-party creditors and charge an origination fee of 0.99% to 8.99%.
Pros:
- Loan terms up to 5 years
- Competitive minimum APR
- No penalties for prepayment
Cons:
- No direct payment to external creditors
- Charges origination fees
- 5 years is the maximum repayment term
Additional Details
Fees and Costs:
Best Egg’s APR ranges between 8.99% and 35.99%. Additionally, there is an origination fee between 0.99% and 8.99% of the loan amount.
Loan Parameters:
Loans vary between $2,000 and $35,000 generally, but up to $50,000 may be available. They target borrowers with minimum credit scores of 640.
Additional Features:
Eligibility will depend on credit score and history, income, and existing debt. They are primarily recognized for debt consolidation and credit card refinancing, but their loans cater to diverse needs, with the exception of post-secondary education or securities investment purchases. The application is fast, under 5 minutes, and turnaround is 1 to 3 business days – some clients even receive same-day funding.
LendingClub
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Why we picked it?
LendingClub is a premier online platform for peer-to-peer lending, and is in every state except for Iowa. Since 2007, they have funded $55 billion in loans to over 3 million customers. They also do direct payoffs to creditors, eliminating the hassle for borrowers. Loans range from $1,000 to $40,000 and provide decent flexibility. Their APR is on the higher side, and their fixed terms of 3 or 5 years and an origination fee can be limiting.
Pros:
- Directly settles with third-party creditors
- Accepts co-applicants
- Open to a wide credit spectrum
Cons:
- Charges origination and late fees
- Confined loan term options
- Elevated APR range
Additional Details
Fees and Costs:
LendingClub’s APRs are between 9.57% and 35.99%, and borrowers should account for the origination fee between 3% and 8%.
Loan Parameters:
Loans are available from $1,000 to $40,000, and a minimum credit score of 600 with at least 3 years of credit history. There is also a controlled debt-to-income ratio of 40% for single and 35% for joint applicants.
Additional Features:
LendingClub offers direct payment to third-party creditors, which can simplify debt consolidation. Using funds for postsecondary education, investments, or gambling is off-limits. Funds are generally disbursed within 4 days after approval, although this could change if there is additional documentation needed.
LightStream
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Why we picked it?
Lightstream has a lending range of $5,000 to $100,000, making it one of the larger maximum lenders. Their terms are flexible, spanning 2 to 7 years, which can help with repayment of larger expenses. They do not have origination, late payment, or prepayment fees. For those selecting autopay, there is a 0.50% discount, and there is also a rate-beat program offering to undercut competitor rates by 0.1% under certain conditions.
Pros:
- Zero origination, prepayment, or late fees
- Attractive competitive rates
- Swift approval and funding process
Cons:
- Absence of prequalification
- Inflexible due dates
- Certain restrictions on loan usage
Additional Details
Fees and Costs:
Lightstream’s APRs are between 7.99% and 25.49%, with reductions available for those using autopay.
Loan Parameters:
Loans are offered between $5,000 and $100,000. They are best suited for applicants with a solid credit history spanning multiple account types and a stable income.
Additional Features:
Lightstream funds can be used for unconventional assets like buying land or tiny homes. However, they do not support loans for things like education or business ventures. Under the right conditions, same-day funding is available.
SoFi
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Why we picked it?
SoFi was founded in 2011 and has grown into a lending powerhouse, facilitating over $50 billion in loans to date. The platform is available in all 50 states, and offers sizeable loans in various term lengths. Loans can be from $5,000 to $100,000 with terms from 2 to 7 years. SoFi caters to those with good credit – minimum 650 – and a decent annual income starting at $45,000. Unlike many of its peers, SoFi does not have origination fees, late penalties, or prepayment charges. They do not offer direct payments to third-party creditors, however.
Pros:
- Soft credit check prequalification
- Quick funding
- Generous loan amounts with extended terms
Cons:
- Soft credit check prequalification
- Quick funding
- Generous loan amounts with extended terms
Additional Details
Fees and Costs:
SoFi’s APR varies between 8.99% and 25.81% with potential discounts for enrolling in autopayments.
Loan Parameters:
Loans can range from $5,000 to $100,000 and terms from 2 to 7 years. Credit scores must be at least 650 and borrower’s minimum annual income should be $45,000.
Additional Features:
SoFi loans can be used for various purposes, but they do not cater to new business ventures, property purchases, investments, higher education, or bridge financing. Post approval, funds can arrive in 1 business day, although larger amounts may take longer.
Understanding Debt Consolidation Loans
Debt consolidation loans are used to merge multiple debts like credit card balances, personal loans, or other liabilities into a single loan with one monthly payment. By consolidating debts, you can simplify your financial life as you no longer need to track multiple payments with varying due dates and interest rates.
The benefit of debt consolidation loans is the potential for a reduced overall interest rate. If you merge high-interest debts into one loan with a lower rate, you can save considerable money over the loan’s duration. It can also help with ease of budgeting. Over time, consistent payments on a consolidated loan can also positively impact your credit score, not only providing financial relief but allowing for better financing in the future.
Operational Mechanics
Debt consolidation loan providers are typically financial institutions, from traditional banks and credit unions to online lenders and peer-to-peer lending platforms. Each will have its own set of eligibility criteria, interest rates, and loan terms. Traditional banks typically have an established reputation and may be able to provide special terms to existing customers. However, online lenders have often streamlined the application and approval process, making it faster for borrowers to obtain funds. Peer-to-peer platforms, connecting individual investors to borrowers, can also often offer competitive rates, especially to those with strong credit.
The process of obtaining a debt consolidation loan begins with due diligence and comparisons of different providers to find the best overall offer. Once selected, the applicant will typically complete an online form or in-person application, providing relevant financial details. The lender then will assess creditworthiness, possibly through a soft or hard credit check, before approving or declining the loan. If approved, the borrower will receive the loan amount either directly to pay off the existing debts, or to their bank account. Then the borrower will make monthly payments on the new consolidated loan until it is fully repaid.
Pros And Cons Of Debt Consolidation Loans
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Impact On Credit Score
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Qualifying For A Debt Consolidation Loan
The primary consideration for lenders in providing a debt consolidation loan is your credit score. It reflects your borrowing history and repayment habits. Typically, a higher score indicates that you’re a trustworthy borrower. If you have a good to excellent credit score, usually 670 and above, you’ll have better chances of getting approved and securing a loan at a more favorable interest rate. If your credit score is on the lower side, lenders may see you as higher risk, leading to higher interest rates or rejection.
If you have a low credit score or limited credit history, you may still qualify for a debt consolidation loan through certain ways:
- Co-signers: By having someone with a stronger credit profile co-sign your loan, you can likely get approval. The co-signer agrees to take responsibility should you default on the loan.
- Collateral: Some lenders will offer secured debt consolidation loans, requiring you to put up an asset as collateral. This reduces the lender’s risk, potentially granting access to better terms or rates. If you default, though, you may lose the asset.
Remember that not all lenders have the same criteria. Traditional banks may be more stringent, but online lenders or credit unions may be more flexible. There are also online lenders who cater specifically to those with poor credit or unique financial situations. Explore your options before completing a loan application, compare their terms, and read reviews.
Steps To Obtain A Debt Consolidation Loan
- Assessment:
Before approaching a lender, have a clear understanding of your financial situation. That might include:
- Debt Tally: Make a comprehensive list of all of your debts, including interest rates, monthly payments, and outstanding balances.
- Budget Analysis: Evaluate your monthly income against your expenses. Determine how much you can realistically allocate to debt repayment.
- Goal Setting: Understand the main reason for consolidating your debts. Having clear objectives will guide your decisions through the process.
- Pre-Qualification:
Many lenders offer pre-qualification that estimates the interest rate you might receive without affecting your credit score. This usually involves:
- Soft Inquiry: There is usually a soft credit inquiry, which does not affect your credit score.
- Rate Estimates: You are usually provided the potential terms of your loans, enabling you to compare to other lenders.
- Application:
Once you’ve chosen your lender, there are a few things you’ll likely need to do or have done:
- Documentation: This is typically proof of income, identification, and details about your debts. Some lenders also ask for employment verification or other financial statements.
- Hard Inquiry: There is an official application process that usually involves a hard credit inquiry. This can temporarily lower your credit score by a few points.
- Approval: If everything goes well, you’ll receive approval and an official loan offer detailing the terms.
- Debt Clearance:
After getting the loan, immediately use the funds to pay off the debts you are consolidating.
- Prompt Payment: Don’t delay in clearing your debts – any lag leads to additional interest accumulation of your old debts.
- Confirmation: Once payments are made, get confirmation from your original creditors that the balances are paid off, ensuring no subsequent surprises about lingering debts.
- Consistent Repayment:
Securing the loan is just the beginning – now you must make the new payments.
- Set Reminders: Ensure you never miss a payment and set up reminders or automatic transfers.
- Stay within Budget: Continuously monitor your expenses to ensure you can meet your monthly obligations.
- Refrain from Accumulating More Debt: With previous debts cleared, it might be tempting to use your now-available credit. Taking on more debt defeats the purpose of consolidation and can spiral you further into a deeper financial hole – try to avoid it.
Debt consolidation is a structured process that demands careful planning. It’s a valuable tool, but its effectiveness relies on the borrower’s commitment to both the application process and subsequent repayments.
Alternatives To Debt Consolidation Loans
Balance Transfer Cards
These credit cards allow you to transfer debts from other credit cards, usually with an introductory period with 0% or very low interest.
| Pros | Cons |
|---|---|
| If you can pay off the debt within the introductory period, you can save significantly on interest. | After the introductory period ends, interest rates can skyrocket. Also, there might be fees associated with the balance transfer. |
Best For: Those confident they can clear their debt within the promotional period.
Credit Counseling
This involves working with a certified credit counselor who offers advice on managing your debts, and may also negotiate with creditors on your behalf.
| Pros | Cons |
|---|---|
| Counselors can often negotiate lower interest rates or monthly payments, and they offer valuable advice on budgeting and financial management. | While many counseling agencies are nonprofits, they might still charge fees for their services. Also, enrolling in a debt management plan through a counselor may impact your credit. |
Best For: Those who are overwhelmed with their debts and want expert advice.
Debt Payoff Strategies
These are self-directed strategies to help you prioritize and pay off your debts, with two notable ones:
- Debt Snowball: Start by paying off the smallest debt while making minimum payments on larger ones. Once the smallest debt is paid, move on to the next smallest, creating a “snowball” effect.
- Debt Avalance: Prioritize debts with the highest interest rate, saving more money over time but not with the snowball method’s quick wins.
| Pros | Cons |
|---|---|
| Provides a structured approach to debt repayment and can lead to paying off debt faster, saving on interest. | Requires discipline and might not be suitable for those with varying monthly incomes. |
Best For: Those who need a structured plan without taking on new credit or working with outside agencies.
Frequently Asked Questions (FAQs)
What Is The Primary Purpose Of A Debt Consolidation Loan?
A debt consolidation loan is primarily used to combine multiple high-interest debts into a single loan with a fixed interest rate and monthly payment.
Can Consolidating My Debts Improve My Credit Score?
In the short term, applying for a debt consolidation loan may cause a small drop in your credit score due to the hard credit inquiry. But over time, if you make consistent on-time payments and reduce your overall debt, it can have a positive effect on your credit score.
Are There Any Fees Associated With Debt Consolidation Loans?
Some lenders may charge origination fees, taken out of the loan proceeds. Factor in any fees when calculating the total cost of a consolidation loan, and always read the loan agreement carefully to understand all associated costs.
If I Secure A Debt Consolidation Loan, Does It Mean I’ve Paid Off My Debts?
Not quite. Your individual debts may be paid off, but you have shifted them into a single, new loan. You’ll still need to repay this over time.
Can I Still Apply For A Debt Consolidation Loan If I Have Bad Credit?
Yes, applying for debt consolidation with bad credit is possible, but you may face higher interest rates, reducing the loan’s benefits. Some lenders do specialize in working with borrowers with low credit scores, but shop rates and understand all terms.
Are There Any Risks Associated With Debt Consolidation Loans?
There are risks, especially if you secure the loan with collateral which you will risk losing if you default on the new loan. Additionally, if your spending behaviors continue after you consolidate, you may accumulate debt further and in a deeper debt hole down the line.
Can I Use A Debt Consolidation Loan For Any Type of Debt?
Generally, debt consolidation loans are used for unsecured debts, like credit cards, medical bills, and personal loans. They might not be suitable for secured debts like mortgages or auto loans. Confirm with your lender before entering into an agreement.
Matthew Levy
Author
After graduating with a Bachelor of Science in Economics from the University of Victoria in 2010, Matthew developed a passion for helping clients meet their financial freedom through strong, risk-adjusted portfolios. Matthew also undertook and completed his CFA® charter in 2015, a rigorous professional credential program promoting the highest standards of education, ethics, and professional excellence in the investment profession.
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