The average personal loan rate is 11.54% as of December 13, according to a Bankrate survey. Personal loan interest rates are trending higher over the past several months, increasing by about half-a-point since early July:
Personal loan rates vary widely based on creditworthiness. Borrowers with very good or excellent credit scores will see much lower interest rates than those with fair or poor credit. Often, borrowers with bad credit will apply for a secured personal loan that uses an asset as collateral in order to achieve lower rates:
If you’re interested in the best debt consolidation loan to pay off credit cards, it helps to know how to compare consolidation loan companies. As you’re shopping around for a personal loan to eliminate credit card debt, consider these factors:
- Minimum loan amount.
- Maximum loan amount.
- Minimum and maximum loan repayment terms.
- Interest rate and APR.
- Loan fees, including origination fees, late payment fees and prepayment penalties.
- Funding and payment options.
- Minimum credit score and income requirements.
- Customer service reviews.
When looking for the best credit card debt consolidation options, it’s important to figure out what works best for your budget. That also means taking into account what your new monthly payment would be for a loan. Understand how long it will take you to pay it off and what you’ll pay in interest.
“You should only consolidate your debt if you’re able to lock yourself in at a lower interest rate and/or lower your monthly payment,” Lambridis says. He cautions that a lower credit score could translate to a higher interest rate on a credit card consolidation loan, potentially overriding any savings benefit.
Find out how fast you’ll receive funds: Some loan companies offer funding as soon as the next business day. If the lender offers direct payment, it can send funds directly to your creditors to pay off accounts.
Flexible payment options can help, too. Some lenders may allow you to set your payment due date, which can help you balance monthly payments in a way that works best for you.
- Consider the debt avalanche method. Pay off your credit card balances beginning with the highest APR, and therefore save the most money because you’re getting rid of high-APR debt first.
- Try the debt snowball method. Pay off your balances from the smallest debt to the largest debt. You’ll pay more interest, but this method will continually give you the psychological boost to keep going.
- Use a balance transfer credit card. If your credit is good enough, you may be able to open a credit card with a high credit limit and an introductory 0% APR, which may last 12 to 18 months. This would give you a chance to pay down your credit card debt without accruing more interest.
- Seek credit counseling. If you feel like you’re drowning in debt and have no hope of getting rid of it, speak with a credit counselor from an agency accredited by the National Foundation for Credit Counseling. Counseling will help you clarify what you need to do next.
U.S. News selects the Best Loan Companies by evaluating affordability, borrower eligibility criteria and customer service. Those with the highest overall scores are considered the best lenders.
To calculate each score, we use data about the lender and its loan offerings, giving greater weight to factors that matter most to borrowers. Personal loan companies are evaluated based on customer service ratings, interest rates, maximum loan term, minimum and maximum loan amounts, minimum FICO score, online features, and origination fees.
The weight each scoring factor receives is based on a nationwide survey on what borrowers look for in a lender.
To receive a rating, lenders must offer qualifying loans nationwide and have a good reputation within the industry. Read more about our methodology.
Credit card debt consolidation rolls multiple credit card balances into one loan.
With a personal loan for debt consolidation, you borrow a lump sum of money – ideally at a low interest rate. You then use that money to pay off some or all of your high-interest credit card balances.
Taking out a personal loan is one of the best ways to consolidate debt for consumers who have substantial credit card debt, says Mark Victoria, senior vice president and partnership program executive at TD Bank. Going forward, you have a single monthly payment to make toward the debt consolidation loan.
Credit card consolidation can offer several financial benefits:
- You could save money on interest. If your consolidation loan has a lower interest rate than the annual percentage rate for the credit cards you pay off, you’ll pay less interest over time.
- There are fewer payments to juggle. Going from multiple credit card payments each month to a single monthly payment can help streamline your financial life.
- You may get out of debt faster. If you have a lower interest rate with a credit card debt consolidation loan, more of your monthly payment goes toward the principal.
There’s also a sense of relief. Debt consolidation gives you a concrete finish line when you know your debt will be paid off, says James Lambridis, founder and CEO of financial information site DebtMD. “An unsecured debt consolidation loan typically lasts from two to five years, so you can give yourself peace of mind that at the end of the term, you will be debt-free once and for all.”
Credit card consolidation has its drawbacks, as well:
- You might pay more interest. Not all loans are guaranteed to provide a lower interest rate than your credit cards, so do the math and make sure the consolidation will be monetarily worth it.
- You might grow your debt. When you pay off a card’s balance, you free up that card to use again – and thus add to your debt. Be sure to stop using the credit card while you pay off the consolidated loan.
Refinancing your credit card debt will help in the long run if you make on-time payments, although you do run the risk of hurting your credit score in the short term.
Consolidating credit card debts using a personal loan can affect your credit score both positively and negatively. However, successfully paying off credit card debt using a personal loan should have a more positive than negative effect on your credit.
Applying for a loan to consolidate credit card debt can trigger a hard inquiry against your credit report, which can take a few points off your credit score. Most lenders allow you to check your rate and loan amount with a soft credit inquiry, which doesn’t affect your credit. Rate checks allow you to shop around for the best debt consolidation loan before you submit a formal application, which does trigger a hard inquiry.
Once you have a new loan open, that can affect the overall age of your credit. As a general rule, the older your account history, the better. Newer accounts could trim a few points off your score.
But inquiries and credit age are smaller factors than payment history and credit utilization, which a credit card refinancing personal loan can help with. Paying your new loan on time can improve your payment history, which accounts for 35% of your FICO score. If you’re paying off credit cards, that can improve your credit utilization ratio, which counts for 30% of your FICO score.
The two biggest mistakes to avoid with credit card debt consolidation loans are late payments and running up new balances on the cards you just paid off. Doing so can hurt your credit history and push you farther into debt.
Victoria says some people go in with the best intentions of consolidating into one loan at a lower rate. However, even though the debt has shifted, consumers should keep in mind that they still likely have access to the credit cards that got them there in the first place.
“Consolidating is the first step,” he says. “Changing spending habits should be the next priority.”
Most lenders allow you to check your rate and loan amount with a soft credit inquiry, which doesn’t affect your credit. These rate checks allow you to shop around for the best credit card refinancing loan before you submit a formal application, which will trigger a hard inquiry against your credit report, potentially taking off a few points. After you submit a application, it can take anywhere from hours to a couple days to receive funding.
By taking and combining all of your multiple outstanding debts into one single loan, you’ll reduce the interest rate and the number of payments to worry about.
To recap, here are the picks: