A debt consolidation loan is a path to relief for a lot of people struggling to manage high-interest debt.
Debt consolidationreplaces your existing debts with a single loan, usually with more favorable terms.
Youll also learn how to choose the right one and key factors to consider during the decision-making process.
What Is a Debt Consolidation Loan and How Does It Work?
A debt consolidation loan is a jot down of personal loan you take out to pay off existing debts.
Its most commonly used to pay off high-interestcredit card debt.
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Doing so reduces the amount of interest you pay over the life of the loan.
This can lead to significant savings, especially if you are consolidating multiple high-interest accounts.
This benefit helps to free up cash flow and add some breathing room in your monthly budget.
Plus, instead of juggling multiple payments, youll consolidate all of your debts into a single payment.
That makes it easier to track your progress and manage your debt.
And a debt consolidation loan can improve your credit score as long as you manage the loan responsibly.
As you pay down your credit card debt, youll lower yourcredit utilization ratio.
This ratio is the percentage of your available credit that youre using.
With a loan comparison tool, see to it youre looking at more than just the interest rate.
That way, youre seeing information that is relevant and tailored to your specific circumstances.
Dont forget about customer service and satisfaction ratings.
Good customer service is essential, especially if an issue comes up during the loan term.
With customer reviews, look for patterns.
A one-off poor review or stellar review wont tell you much.
But consistent issues and high praise can give you an idea of what to expect from the lender.
Just be sure to verify the source.
Ideally, reviews are coming from verified customers and the platforms have some kind of moderation process.
Organize reviews from newest to oldest for an accurate reflection of the lenders current customer service.
Note: Loan terms accurate as of March 2025 and subject to change.
See lenders for most up-to-date information.
It offers rate discounts of between one and two percentage points pretty significant!
for borrowers who use a Universal Credit personal loan to directly pay off credit card debt.
The APR is 11.6935.99% on loan amounts of $1,000-$50,000.
There also are zero repayment penalties.
Enjoy no prepayment penalties and same-day funding.
The APR is 7.99%-24.99% on loan amounts from$2,500 $40,000.
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LendingClub: Best for Bad Credit Loans
LendingClubcalls itself an online marketplace bank.
It offers checking accounts and personal loans, including loans for debt consolidation, up to $40,000.
Youll get funds within 48 hours and there are no repayments penalties.
You dont have to deal with investors directly; Prosper manages the utility and loan origination.
Loans are available from $2,000 to $50,000 with a credit score as low as 600.
The APR is 8.99%-35.99% with no prepayment penalty.
The lenders minimum credit score is just 580; most borrowers have FICO scores between 600 and 700.
The APR is 9.9535.99% on loan amounts from $2,000 $35,000.
Its loans are available in every state except Nevada and West Virginia.
The APR is 7.99% 35.99% on loan amounts from $1,000 $36,500.
How to Apply for a Debt Consolidation Loan
Ready to apply for a debt consolidation loan?
List out all of your current debts, from credit card balances to auto loans and student loans.
Jot down the outstanding amounts, interest rates and minimum monthly payments.
Finally, assess your monthly income and essential expenses.
You want to determine how much you could afford to pay each month on your new loan.
Dont skip this step.
As you review your credit score, look for any inaccuracies.
you could dispute errors with the corresponding credit bureau.
Look for the most favorable terms and rates that will work with your credit score and needs.
This is a good avenue to pursue to narrow down your options.
Be as thorough and as accurate as possible.
You may need to upload or scan documents into the program.
check that you understand every aspect of the loan and its conditions before signing and submitting.
Monitor the system status via email or through the lenders portal.
If youre approved, youll receive details via a final loan offer.
This information should be reviewed carefully to ensure it matches what was offered during the tool process.
Heres what to keep in mind:
Interest rates are first on this list for a reason.
The interest rate you receive on your loan will significantly impact the total amount you end up repaying.
A variable rate, on the other hand, can change over time based on market conditions.
The loan term is the length of time over which youll repay the loan.
The term will affect your monthly payment and the amount of interest you paid.
Usually, a shorter term leads to higher monthly payments but lower total interest costs.
You accrue less interest this way because you are paying off the principal at a faster rate.
With a longer term debt consolidation loan, your monthly payments will be lower.
However, youll pay more total interest because you are paying down your principal at a slower rate.
Debt consolidation loans typically have origination fees.
This is a fee charged by the lenders to process your tool.
You may also encounter prepayment penalties if you pay off your loan before the loan term ends.
Likewise, its good to be aware of potential late fees for missed or late payments.
Consider setting up automatic payments to avoid this fee.
Lenders use your credit score to determine your eligibility for the loan.
It will impact how much you are approved to borrow, the terms and interest rates.
Generally, the higher your credit score, the more favorable terms and rates you will receive.
Credit Card Consolidation Loans vs.
They may also offer0% APRfor a certain period of time as an incentive toperform a balance transfer.
It is used to pay off or down debts.
The borrower then makes monthly payments on the loan at a fixed interest rate.
Alternatives to Debt Consolidation Loans
Debt consolidation loans arent the only avenue for tackling your debt.
Debt Settlement: you might negotiate with creditors to reduce what you owe, also known as debt settlement.
you could also go through companies likeNational Debt Relief, which will do the negotiating for you.
You might also be able to negotiate a reduced repayment amount on your own directly with your creditors.
This kind of settlement usually shows up on your credit report as a negative mark.
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Up for a debt challenge?
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Freelancer Veronica Matthews contributed to this post.
