Best Low-Interest Consolidation Loans & Average Rates

If you’re losing the fight with high interest credit card debt, this might be a good time to see if you can qualify for a low interest debt consolidation loan.

Debt consolidation has helped millions of people dig out of financial holes. If you’ve decided to join them, the first item to tackle is convincing a lender that you are a worthwhile candidate.

A debt consolidation loan should reduce the interest rate and monthly payment you make on credit card debt. The saving from a reduced interest rate could be substantial.

The average credit card interest rate is 16.7% in 2022, but those with significant debt typically pay 20%-30%. Knock that down to 10% — a rate those with good credit scores could get on a consolidation loan – and you save $75-$100 a month on a $5,000 loan.

It doesn’t take a mathematician to see how a debt consolidation plan can make sense, but it’s not a cure-all plan for debt relief. If you don’t curtail the spending habits with credit cards that got you into the hole, you could end up worse off than ever.

The Interest on a debt consolidation loan should go for somewhere between 6% and 20%. Debt consolidation loans are offered by banks, credit unions and online lenders. To find the one best for you, it’s a good idea to shop around.

Each debt consolidation loan has its own interest rates, repayment terms and qualification requirements. Here are just some of the major online lenders:

How to Get Low Rates on a Debt Consolidation Loan

You do not want to go into this blindly. Know where you stand financially and grade your options before accepting a debt consolidation loan. Here’s a seven-step process that should improve your chances to get the right loan.

Step 1: Evaluate your own finances – How much do you need to borrow to pay off all credit card bills? How much can your budget afford each month to pay off the consolidation loan? Lenders will assess whether your income is sufficient to cover your payment obligation.

Step 2: Check your credit report and score – Are there mistakes on your credit report you could correct to improve your score? Is your score close enough to cut-off lines between fair and good, or good and excellent, that taking a few months to massage it will make a difference in the interest rate charged?

Step 3: Consider other options – Do you have enough equity in your home to take out a home equity loan or line of credit (HELOC) that would pay off the credit card bills and leave you an affordable monthly payment? Is it worth putting your home at risk of foreclosure if you miss payments?

Step 4: Talk to a certified counselor from a nonprofit credit counseling agency – They can evaluate your overall situation; help you create an affordable budget and advise you on the best way to eliminate your debt. And the advice is FREE!

Step 5: Speak with several qualified lenders – Be certain you understand the terms and conditions of the loan before you sign. Interest rate is paramount, but so are fees and repayment period. Don’t borrow more than you need to pay off credit card debt, or you’re just asking for more problems.

Step 6: Gauge how strong a commitment you will make to this process – Does eliminating credit card debt mean enough to you to curb careless spending habits and be responsible enough to make payments every month? Be careful. If you are not committed, this could backfire and cause you even worse financial problems.

Step 7: Make an Informed choice – If you have taken the first six steps, you should know how much money to borrow, what the interest rate and monthly payment will be and whether this is a comfortable financial move. Is doing all this going to save you enough money for this to be worth the effort.

Low Interest Debt Consolidation Loans for Bad Credit

It’s not impossible to get a debt consolidation loan if your credit history is less than sterling. It’s just not going to be easy if your credit score is below 660. You will pay high interest rates for a loan and that’s if you get one.

But it can be done!

Having equity in your home would be a big help, though a home equity loan means risking your house if you don’t keep up with your payments.

Without home equity, improving your credit score must be a priority. That’s at least a six-month project. If you don’t want to wait that long and your score is above the 580 range, don’t give up.

Some lenders place a priority on a good debt-to-income ratio, which is monthly debt payments divided by income. If your number is under 35%, there is a possibility you can obtain a loan at a decent interest rate.

Then there are companies like Upstart.com that place a heavier emphasis on an applicant’s education and earning potential before approving a loan. Upstart’s average interest rate is about 20%. But if your credit score is under 600, you’re probably paying 30% or higher on your credit cards, so the math might work out.

» Learn more about: Upstart Loan Reviews

What Is Debt Consolidation and How Does It Work?

The process for a debt consolidation loan is based on pretty simple math. You want to make one payment, to one lender, at a lower interest rate than you’re paying on credit cards.

The average of your combined interest rates for all your debt can be relatively high, especially if you have a lot of credit card debt. A debt consolidation loan allows you to combine all those bills and pay them off with a loan that has a lower interest rate.

You still must repay the consolidation loan, but your credit card debt is wiped out. This should make your debt more manageable by reducing the number of bills you pay each month and creating a fixed payment schedule at a lower interest rate.

The loan agreement should tell you in advance how long it will take to pay It off and make it easier for you to budget payments. The catch is that you must meet underwriting criteria that includes a good credit score, preferably something higher than 670, and a debt-to-Income ratio of under 35%.

Other things to consider when searching for a loan:

• Is the loan secured (putting up a house or car as collateral) or unsecured (no collateral needed)?
• Have you created a budget that demonstrates you can afford this loan payment every month?
• Will this be a fixed-interest rate (much preferred) or variable rate?
• How long will it take to pay off the loan?

Many lenders will prequalify borrowers for consolidation loans, allowing you to review offers side-by-side before deciding what to do.

Average Debt Consolidation Loan Rates by Credit Score

The average rate for a three-year personal loan in 2022 was right at 11% for borrowers with a credit score of 720. The average rate on a five-year personal loan was 12.75%.

The key word there – Average.

Your rate, like everybody else’s, will probably be higher or lower based on your credit score and debt-to-income ratio.

A good credit score of 720 or higher will get you around a 9% interest rate. A credit score of 600 or lower will get you 20% or higher, possibly much higher.

Choosing the Best Debt Consolidation Loan

Looking for a loan isn’t like window shopping for a pair of shoes. We’re talking big money, and it takes some serious thought to figure out the best way to go.

Interest rate is a big factor to consider, but so are the loan costs, like underwriting and processing. These “origination fees” can run between 0.5% and 10% of the total loan amount. If you’re on the top end of that, it’s going to get pretty pricey and a consolidation loan might cost you more than just paying directly to the credit card companies.

Lender features are also a factor, things like credit monitoring, discounts for direct payments, hardship programs and other services. Those could also add up to a significant savings.

So again, it will pay to shop around.

Will a Debt Consolidation Loan Affect My Credit Score?

If everything goes as planned – meaning you make your monthly payments on time – your credit score should improve in the long run. And putting away your credit cards should stabilize your entire financial picture.

The immediate downside is lenders will make a hard check on your credit report, which will bring your score down slightly, but that’s like taking one step back in order to take three forward.

Debt Consolidation Loan Alternatives

A new loan to clean up a credit card mess isn’t your only solution. Here are other options to consider:

Tapping Home Equity

Home equity loans and home equity lines of credit (HELOCs) allow you to borrow against the equity in real estate and essentially treat It as a consolidation loan. The advantages to this strategy are:

• Much lower interest rate because you are providing collateral.
• Money can be used at your discretion. In other words, you can pay off multiple credit card debts, if you want.
• Interest rate and monthly payment are fixed, making it easier to budget.

There are disadvantages. The most obvious is putting your home at risk if you fail to make payments. Also, fees associated with equity loans can add to your debt.

Credit Card Balance Transfers

Balance transfer allows you to move debt from your high-interest cards to a card that charges little or no interest for a specified amount of time. This tactic can save on interest for 6-18 months or longer, if you qualify. Generally speaking, you would need a credit score over 670 to qualify.

If you do get a balance transfer card, the trick is paying off your debt while the promotional rate is in effect. If you don’t pay off the balances, you will return to high-interest payments when the introductory low- or no-interest period ends.

Credit Counseling

Financial professionals at nonprofit credit counseling agencies can help you create a strategy for eliminating unsecured debt. One way is through a debt management plan that reduces the amount of interest you pay to around 8%.

If you opt for debt management, the nonprofit agency works with your card company to create an affordable monthly payment that eliminates the debt in 3-5 years. However, you must agree to stop using credit cards while in the program. The agency usually charges a monthly fee for the service.

Debt Settlement

Debt settlement companies, which are often for-profit businesses, will settle your credit card debts for less than you owe. They claim to reduce what you owe by as much as 50%, but when you factor in fees, late payment penalties and interest charges, it’s likely to be closer to 25%.

Not all creditors will accept a debt settlement proposal. If yours does accept a settlement, you face tax consequences. The IRS treats forgiven debt over $600 as income.

In other words, debt settlement is pretty much a last resort.

Nonprofit debt settlement

This is a new program that would be considered the first cousin of traditional debt settlement in that you only pay 50%-60% of what you owe to settle your debt.

The difference is that there is no negotiating involved in nonprofit debt settlement. Card companies agree from the outset on how much your should repay. You make 36 fixed monthly payments to eliminate your debt. Miss any of those payments and the program is canceled.

The other downside is that the program is so new that only a few nonprofit credit counseling agencies offer it and only a few banks and card companies has signed on to participate.

Go to a search engine and type in “Nonprofit Debt Settlement” to find an agency that offers this service.

Bankruptcy

If your debts exceed your ability, you can file for bankruptcy. But first you’ll need to consult with a court-approved credit counselor to review your options.

Chapter 7 is the most common personal bankruptcy option. It eliminates most of your debts, but there are some non-exempt debts like second homes, paintings, valuable cars, property, jewelry and investment accounts, that will be sold and the money used to pay off creditors. Other non-exempt debts like taxes, alimony, child support, and student loans can’t be discharged.

Chapter 13 is the other popular form of bankruptcy. It creates a repayment plan that eliminates some of your debts and allows you to keep certain personal property as long as you stay current on your repayment plan.

Bankruptcy severely damages your credit score and can limit your ability to borrow for at least 7-10 years after your case is discharged.

Is a Debt Consolidation Loan Worth It?

Debt consolidation is definitely a worthwhile choice – if you hold up your end of the bargain.

Debt consolidation loans are easier to manage than credit card debt, especially if you have multiple credit cards. You make one payment to one source, once a month. This will save you money and your credit score should improve.

All good!

The real issue is whether you can change your spending habits so new bills don’t pile up while you’re paying off the old bills. If you really mean to succeed, you need to give your credit cards some time off while you pay off the debt. They could use the rest.

When you finish paying off the debt, you can decide whether you want to drag out the cards. If you do, you probably will have learned to use them wisely. That will hopefully keep you from ever again having to dig yourself out of a financial hole.