How To Choose the Best Debt Consolidation Loan Lender

A debt consolidation loan has a host of advantages. You can trade multiple debts and payments for a single loan with one fixed payment, lower your monthly payments, and, ideally, save on interest. Debt consolidation is the most common reason borrowers get personal loans, according to Credible personal loans data.

But the array of lenders offering debt consolidation loans can be overwhelming. If you're wondering how to choose the best debt consolidation loan and lender, we've got your back. We'll cover how to evaluate debt consolidation loan types, how to compare rates, terms, costs, and fees, plus which loans have certain perks that others don't.

Types of debt consolidation loans

You may find that one of the following loan types fits your needs best:

Personal loan

• Fast funding
• No collateral required for unsecured loans
• Fixed interest rates and payments
• Years-long repayment terms

Personal loans provide a lump sum of cash that you can use to pay off your debt, leaving you with just one monthly payment to the personal loan lender. Personal loans typically have lower interest rates than credit cards, which can make them a good choice to consolidate or refinance credit card debt. Plus, rates are fixed, and personal loan lenders charge simple interest — unlike most credit cards, you won't end up owing interest on unpaid interest.

But your rate depends on your credit score, income, current debt, the lender, and the length of the repayment term. Repayment terms can range between two and seven years for debt consolidation.

Home equity loan

• Large loan amounts (dependent on home equity)
• Low interest rates
• Fixed interest rates and payments
• Years-long repayment terms

Home equity loans offer a lump sum of cash with a relatively low interest rate, but these loans are secured by the equity in your home, so there's a risk of foreclosure if you fail to repay. You'll also face upfront fees and a potentially lengthy funding process (weeks or longer). But a home equity loan may be the best option if you have sufficient home equity and a high debt balance you want to pay off.

You'll need at least 15% to 20% of equity in your home to qualify. Since repayment terms are available up to 30 years (with some lenders), you could secure very low monthly payments. However, an extended repayment period increases the amount you'll pay in interest and could make the loan more expensive in the long run than higher-rate/shorter-term loans.

Compare: Home Equity Loan vs Personal Loan

Balance transfer credit card

• 0% APR promotional periods
• Quick approval and fund transfers
• Can avoid a hard credit inquiry with a balance transfer offer on an existing card

Many credit card issuers offer a 0% APR promotional period for up to 21 months, either on a new card you apply for or a card already in your wallet. You can transfer the balance from your other credit cards and avoid paying any interest on the debt as long as you

1. make on-time payments and
2. repay the full balance during the promotional period.

Some cards charge balance transfer fees, often ranging between 3% and 5% of the amount you transfer, which are added to your new balance. Just be prepared to pay off the entire balance during the introductory period to avoid getting stuck paying the standard APR once the promotion expires.

Compare: Debt Consolidation Loan vs. Balance Transfer

Approval requirements

Eligibility criteria for debt consolidation vary by loan type and lender. For example, some personal loan lenders only accept borrowers with good or excellent credit, while others consider borrowers with fair credit, poor credit, or no credit history. Many also have minimum income requirements.

Checking a lender's approval requirements can help you narrow down your options. Some lenders don't disclose specific criteria but allow you to prequalify without hurting your credit. This can give you an idea of interest rates, loan amounts, and repayment terms you might qualify for. Just note that your final loan offer may be different.

Learn More: What Are the Requirements for a Personal Loan?

Loan amounts

Narrow your options to lenders that offer the amount you need to pay off your high-interest debt. Some personal loan lenders offer up to $100,000 or more, but the amount you qualify for depends on your credit score and other financial factors.

A home equity loan may offer higher borrowing limits depending on the amount of equity you have in your home. And since home equity loans often have lower rates than unsecured loans, you might be able to better afford the monthly payments on a higher loan amount.

Balance transfer cards may offer smaller loan amounts than personal loans or home equity loans, but they could be used in combination with either one to lower your overall amount of debt.

Interest rates and fees

The average APR on a two-year personal loan is 12.32%, according to the Federal Reserve, but some lenders offer personal loan rates below 7% to borrowers with excellent credit. Borrowers with fair or poor credit may pay as much as 36% on a typical personal loan.

Here are the average rates for borrowers prequalified for debt consolidation or credit card refinancing loans on the Credible personal loans marketplace. Data is current as of the last complete month:

Average debt consolidation loan rates by credit score

Fees

Some lenders charge an origination fee to cover the lender's costs to make the loan or offset the lender's risk. This fee may be up to 12% of the loan amount and is accounted for in the loan's APR. It's typically deducted from the initial loan proceeds, so you'd need to borrow more than the amount of debt you want to consolidate if charged one.

Some lenders don't charge any fees, but those lenders typically have stricter qualification criteria, like high credit score requirements. All of the following lenders offer no-origination-fee personal loans.

Learn More: Best Personal Loans With No Origination Fee

Repayment terms

Some lenders offer more repayment term options than others. Choosing the right repayment term is important because it impacts your monthly payment and the total cost of borrowing over the life of the loan. “It is important to make sure that the monthly payment is affordable, but many consumers fail to realize the long-term impact of stretching out loans in order to lower the monthly payment,” says Michael Sullivan, personal finance consultant with Take Charge America, a credit counseling agency.

Time to fund

Most personal loan lenders can disburse the loan funds to your bank account within a few business days, and some even offer same-day funding to eligible borrowers. Some debt consolidation lenders also offer to pay your creditors directly, but you should make sure the processing time doesn't lead to a late payment on your credit card. (Same-day funding is often not available for direct payments to creditors.)

A balance transfer may take days or possibly weeks to process, while a home equity loan, which requires an appraisal, can take weeks to a month or longer to close. Consider how quickly you want the funds when choosing a loan type and lender.

Learn More: How Long Does It Take To Get a Personal Loan?

Discounts and perks

Some lenders offer opportunities to get a discounted APR — for example, you could get a discount for enrolling in autopay, having the lender send funds directly to your creditors, or by having an existing relationship with a bank.

Some lenders also offer perks to borrowers. For example, SoFi gives members access to free financial advice from a credentialed advisor and discounts on travel, estate plans, and more. These benefits may be less important than other factors like rates and fees, but if you're deciding between two lenders, they could break a tie.

Customer service

If you'd like to talk to a loan expert in person, consider applying for a debt consolidation loan from a local bank or credit union. If you decide to go with an online lender, make sure the lender offers convenient options for getting support.

Some lenders only respond to email requests, while others maintain extended phone support hours or offer a live chat tool. You should also check customer reviews on third-party sites like Trustpilot.

How to apply for a debt consolidation loan

1. Review your finances: Check your credit score and evaluate your budget to determine which loans you can qualify for and the maximum monthly payment you can afford.
2. Narrow your options: Research lenders based on the criteria above and choose a few options that meet your needs.
3. Prequalify: Get a rate estimate from a few different lenders by providing some personal information — prequalification is quick and doesn't hurt your credit.
4. Compare APRs and terms: Compare lenders based on APR, which expresses the total annual borrowing cost (including interest and upfront fees) as a percentage of the loan amount. Also, check the repayment term, monthly payment, and total borrowing cost for each loan option.
5. Choose a lender: Choose the least costly option that you can comfortably manage. Note that your final rate could differ from the estimate.
6. Formally apply: Complete a full application and upload any required documents, such as pay stubs and tax returns. Note that a formal application for a personal loan often requires a hard credit check, which will cause your credit score to dip.
7. Sign your documents: Read your loan agreement carefully before signing.
8. Choose your disbursement option: Depending on the lender, you may have a couple of disbursement options — you can elect for the lender to pay your creditors directly, which will require you to supply additional information about your existing accounts, or you can receive the money in your bank account.

Learn More: How To Apply for a Personal Loan

Read More:

• Best Debt Consolidation Loans
• Best Debt Consolidation Loans for Fair Credit
• How Does Debt Consolidation Work?
• Pros and Cons of Debt Consolidation
• How Debt Consolidation Helps Your Credit
• How To Consolidate Bills Into One Payment
• How To Get a Debt Consolidation Loan With Bad Credit
• Types of Debt Consolidation Loans