Best Debt Consolidation Loans of September 2024 - NerdWallet (2024)

Compare the best debt consolidation loans

NerdWallet has reviewed more than 35 financial institutions to find the best personal loans for consolidating debt. Our top picks include lenders that offer low interest rates, a wide range of loan amounts and features that streamline the debt consolidation process.

What are debt consolidation loans and how do they work?

Debt consolidation loans are a type of personal loan that combine multiple unsecured debts — such as credit cards, medical bills and payday loans — into one fixed monthly payment, making it easier to get out of debt.

As long as the interest rate on the debt consolidation loan is lower than the average rate of your existing debts, you’ll save money on interest and potentially pay off your debt faster.

Online lenders, banks and credit unions offer debt consolidation loans. Once you’re approved, the lender deposits the loan into your bank account, and you use that money to pay off your debts, so you’re left with only the new loan. Some lenders even pay off your creditors for you.

You then make monthly payments toward the debt consolidation loan until all your debt is paid off. Payments are fixed for the life of the loan, typically two to seven years.

Debt consolidation loan example

Let’s say you have $10,000 in credit card debt, spread out across four different credit cards. The average annual percentage rate on a credit card is about 23%. If you’re making a minimum payment of $75 on each card, at 23% APR, it will take you four and a half years to be debt-free, and it will cost you an extra $6,200 in interest, on top of the original debt.

But if you pay off all your credit cards at once using a $10,000 debt consolidation loan, at 15% APR, you’ll save money on interest and get out of debt faster. Here’s how it breaks down.

Are debt consolidation loans a good idea?

Debt consolidation loans are a good idea if you can get a lower annual percentage rate than what you're currently paying on your other debts. Like with all financial decisions, you should carefully weigh the pros and cons of consolidating your debts before you apply for a loan.

Debt consolidation loan interest rates

The interest rate you get on a debt consolidation loan depends on factors like your credit score and debt-to-income ratio, which is the percentage of your monthly income that goes to debt payments. Borrowers with good to excellent credit scores tend to get the lowest interest rates on debt consolidation loans. See the table below to get an idea of what rate you can expect.

Average debt consolidation loan interest rates

Source: Average rates are based on aggregate, anonymized offer data from users who pre-qualified through NerdWallet from August 1, 2024, through August 31, 2024, and chose credit card consolidation or debt consolidation as their loan purpose. Rates are estimates only and not specific to any lender. The lowest credit scores — usually below 500 — are unlikely to qualify. Information in this table applies only to lenders with maximum APRs below 36%.

How does the Federal Reserve impact debt consolidation loan interest rates?

The Federal Reserve doesn’t directly set interest rates on debt consolidation loans. It sets the federal funds rate, which trickles down to impact the interest rates of many types of credit, including debt consolidation loans.

You’ve probably heard that rates are high right now, and while that’s true, fixed-rate credit, such as debt consolidation loans, tend to be less affected.

Economists predict the Fed will make a rate cut during its upcoming meeting in September, and interest rates on debt consolidation loans may drop as a result, but it’s hard to say by how much.

Since lenders look at multiple factors when determining what rate you’ll get on a debt consolidation loan, it may be best to consolidate now and start the path toward getting out of debt, instead of betting on a rate drop that isn’t guaranteed.

How to compare personal loans for debt consolidation

Check that the available loan amounts and terms match your debt: Personal loans for debt consolidation come in a wide range of loan amounts ($1,000 to $50,000) and repayments terms (two to seven years). Look for a lender whose loan product meets your debt payoff needs.

Look for an annual percentage rate lower than your existing debts: The loan's annual percentage rate, or APR, represents its true annual cost and includes interest and any fees. Choose a low rate with monthly payments that fit your budget.

Avoid origination fees if you can: Some lenders charge origination fees to cover the cost of processing your loan. This one-time fee typically ranges from 1% to 10% of the loan amount and is deducted from your loan proceeds or added to the loan balance.

Avoid loans that include this fee to keep costs down, unless the APR (which includes the origination fee) is still lower than loans with no origination fee.

Look for special debt consolidation features: Some lenders offer consumer-friendly features like direct payment to creditors, which means the lender pays off your debts once your loan closes, saving you that task. Other lenders may offer free credit score monitoring.

How to get a debt consolidation loan

1. Add up current debts and calculate the combined interest rate

The first step in getting a debt consolidation loan is having a clear picture of your current debt. You can use NerdWallet’s debt consolidation calculator to see your total balance, total monthly payment and combined interest rate across all debts.

Keep two numbers in mind moving forward: Your total debt, because this is the loan amount you need to apply for, and your combined interest rate, because you’ll want a lower interest rate on your consolidation loan.

2. Pre-qualify and compare loan options

One of the best ways to compare loan offers is to pre-qualify with multiple lenders, which lets you see your potential loan terms, including APR, without any effect on your credit score. Though not all banks or credit unions offer pre-qualification, most online lenders do.

3. Apply for a debt consolidation loan

Most loan applications are online and ask you to supply personal information like your Social Security number, address and other contact details. You also may be asked to provide proof of identity, employment and income.

Once you’ve submitted your application, the lender will make an approval decision. If you’re approved, you’ll sign the loan agreement and receive the funds. Funding time varies among lenders, but some lenders can fund the same day you’re approved.

4. Pay off creditors

Here’s the most important step: Use the loan proceeds to pay off your existing debts. Some lenders send the funds to your creditors for you, so you’ll need to provide account information about your existing debts — and check the accounts to make sure they’re paid off.

If a lender doesn’t offer direct payment, they’ll deposit the funds in an account of your choosing or mail a check, if you prefer. It’ll be up to you to make sure the right amount goes to each debt.

5. Begin making payments on your new loan

Once your existing debts are paid, you’re left with your new loan. Personal loan payments are monthly, though there’s usually no fee for paying off a loan early. Make a plan now to manage your personal loan payments.

As you make progress on paying off your loan, try to keep your credit card balances at or near zero until you’re debt-free. But avoid closing the accounts, which can lower your credit score.

What to know about debt consolidation loans for bad credit

You can still get a debt consolidation loan if you have bad credit (a 629 credit score or lower).

Look specifically for lenders that let you pre-qualify with a soft credit check — that way you can check if you meet the lender’s requirements without taking a hit to your credit score. This will also help you check if the rate you qualify for is lower than your existing debts.

Other ways to get out of debt

A debt consolidation loan isn’t your only option for paying off debt.

0% balance transfer credit card

For borrowers with good to excellent credit, transferring debts to a 0% balance transfer card is a great option — as long as you can pay it off during the introductory period, which can last up to 21 months.

This is sometimes called credit card refinancing, and it's similar to a consolidation loan. But because you pay no interest during the introductory period, you can get out of debt even faster.

Credit counseling

Nonprofit organizations offer credit counseling, which includes helping you create a debt management plan. Similar to other consolidation products, these plans roll your debts into one manageable payment at a reduced interest rate.

DIY debt payoff strategies

If you’re not sure how to tackle debt, you may not need to consolidate. The debt snowball and debt avalanche methods are two common and effective strategies for paying off debt.

The snowball method focuses on paying off your smallest debt first, building momentum as you go. The avalanche focuses on paying off the debt with the highest interest rate first, then applying the savings elsewhere. Both can boost your payoff speed.

Debt relief

If you have significant debt (40% or more of your income) and no plan to pay it off, you may want to explore other strategies, like debt settlement or bankruptcy. Both of these options help eliminate unsecured debts, but they hurt your credit and are typically a last resort.

Frequently asked questions about debt consolidation

Last updated on September 11, 2024

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