How to Get the Lowest Debt Consolidation Loan Rate

Low Interest Debt Consolidation Loans

Lowest Interest Rate

Debt consolidation is a common “get-out-of-trouble” solution for troubled consumers, especially those with overwhelming credit card debt. You take out one big loan and use it to pay off smaller debts, like credit cards. It simplifies bill-paying and, if done correctly, should reduce the interest rate and your monthly payments, providing some credit card debt relief.

The problem is that interest rates on debt consolidation loans vary wildly, ranging from as low as 5% to as high as 36%. It only makes sense to consolidate if you can score a low-interest loan that is half or less the rate you’re currently paying. Most consumers having trouble with credit cards, are paying an interest rate around 25%, which adds up quickly if you can’t afford to pay it off at the end of the month.

So how do you get a single-digit interest rate that helps you pay off debt faster?

Improve your credit score!

Improving your credit score not only gets you a better rate on traditional debt consolidation loans, but also may also make you eligible for other types of a low-interest loans from a bank, credit union or online lender.

If you really get committed to on-time payments, your score may help you qualify for a zero-percent interest balance transfer credit card. Generally speaking, you would need a credit score above 700 to qualify for one of these cards.

Know Your Options

If poor credit has affected your loan eligibility, a credit counselor can help you determine your options.

How Are Debt Consolidation Loan Interest Rates Determined?

Credit score and a willingness to provide collateral (a home or car) are the two factors that weigh most heavily in determining the best interest rate for a debt consolidation loan.

Your credit score is vital to any loan. It helps lenders evaluate the likelihood you will pay it back. A higher score means you pay your bills on time, and you’re more likely to pay back a loan, so your interest rate will be lower. A low credit score means you likely have, or have had, trouble paying your bills, which makes it risky to loan you money.  That means higher interest rates, or even that you might be rejected for a debt consolidation loan.

Credit scores range from 350 to 850, and it’s extremely helpful to know your score. There are several credit card companies, online websites and banks that will give you a free credit score, so find one and see where you stand.

You should understand that the “free score” you receive is a ballpark figure, not the identical number that the lender will receive. However, it should be close enough to let you know whether you fall in the excellent, good, fair or poor category that determines your final interest rate.

Having collateral to secure the loan will improve your standing, regardless of where your score lands you. Lenders believe that the threat of losing the home or car you put up as

collateral, is enough encouragement to make your debt consolidation loan payment every month. Lenders will give you a better rate because they have something to fall back on if you default.

Still, rates and terms can vary, depending on your situation, and every situation is different.

“Each consumer has different needs, and many lenders provide specialized loans designed to meet them,” USA Today said in a June 2020 survey of commercial debt consolidation loans.

What Is the Average Interest Rate for a Debt Consolidation Loan?

As of July 2020, interest rates for debt consolidation loans ranged from 5.49% to 34.99%, depending on the amount borrowed, what type of lender it’s borrowed from, the term of the loan and the borrower’s credit score. The average rate was 11.09%. The most common rates for those with good credit were in the 5.95% to 5.99% range.

Understanding Interest Rates

You have undoubtedly heard the term “interest rate” a million times, but what does it mean as far as your pocketbook goes?

Interest is money you pay for the privilege of borrowing. Let’s say a bank loans you $1,000 at a 6% annual interest rate. That means you pay an extra $60 if you pay back the $1,000 at the end of 12 months.

That’s called “simple interest.”

Most loans, though, use “compound interest,” where you don’t just pay interest on the initial $1,000, you also pay interest on the accumulated interest. The rate that debt grows depends on how often the loan compounds, or comes due. With credit cards, it’s typically once a month. And it can add up if you’re only making minimum payments, or small payments.

The bottom line: When you choose debt consolidation, shop around for the lowest interest rate possible.

Examples of Debt Consolidation Loan Interest Rates

Below is a sample of what you can expect for debt consolidation loan interest rates at a bank, credit union, and online lender in the summer of 2020.

This is based on a $10,000 debt consolidation loan, with a 5-year term.

BANK

Good Credit
(above 720):

7.25%
interest rate

$199.19
monthly payment

$11,951.62 total repayment
($10,000 principal plus $1,951.62 total interest over life of loan)

Average Credit
(660-720):

10.25%
interest rate

$213.70
monthly payment

$12,822.16 total repayment
($10,000 principal plus $2,822.16 total interest over life of loan)

Bad Credit
(under 660):

19.65%
interest rate

$263.00
monthly payment

$15,779.71 total repayment
($10,000 principal plus $5,779.71 total interest over life of loan)

CREDIT UNION

Good Credit
(above 720):

6.99%
interest rate

$197.96
monthly payment

$11,877.89 total repayment
($10,000 principal plus $1,877.89 total interest over life of loan)

Average Credit
(660-720):

9.050%
interest rate

$207.83
monthly payment

$12,469.58 total repayment
($10,000 principal plus $2,469.58 total interest over life of loan)

Bad Credit
(under 660):

17.775%
interest rate

$252.71
monthly payment

$15,162.71 total repayment
($10,000 principal plus $5,162.71 total interest over life of loan)

ONLINE LENDER

Good Credit
(above 720):

6.89%
interest rate

$197.00
monthly payment

$11,820 total repayment
($10,000 principal plus $1,820 total interest over life of loan)

Average Credit
(660-720):

9.428%
interest rate

$209.67
monthly payment

$12,580 total repayment
($10,000 principal plus $2,580 total interest over life of loan)

Bad Credit
(under 660):

16.637%
interest rate

$246.58
monthly payment

$14,794.69 total repayment
($10,000 principal plus $4,794.69 total interest over life of loan)

How to get a Low Interest Debt Consolidation Loan

The best route to a debt consolidation loan is through a bank or other lending institution, such as a credit union or online lender. The idea is that you borrow enough to pay off multiple debts, and then repay the lender with one check. It’s simpler that juggling all those payments, because you’re dealing with one lender and one monthly payment.

Even if you have an established relationship with your bank, it pays to shop around for the best interest rate and get at least three quotes for comparison. Credit unions often have better rates than national banks because they are nonprofit and have a cooperative structure that prioritizes members’ needs.

When checking out online lenders, stick to reputable sites and read the fine print about interest amounts. More and more lenders are doing online applications, and though it may seem easier than a face-to-face meeting, be sure you have all your financial ducks in order.

Whether applying in person, or online, here are the steps you should take, what homework you should do and what will happen when you apply

  • Check your credit report to make sure everything is accurate before applying. Any mistakes on your credit report will have a negative impact on your credit score and result in a higher interest rate on your loan.
  • Take steps to improve your credit score. Even a slight variance upward can save significant money.
  • Make sure you apply for a fixed-interest loan and not a variable interest rate, which could add to the total cost of the loan.
  • If you’re applying in person, make an appointment and specify the amount of money you’d like to borrow. The lender might ask what you will do with the money, so know your financial situation and how the loan will improve it.
  • When applying in person be sure to bring identification, proof of address, Social Security card and proof of income, either pay stubs or tax returns. You’ll need this information for online applications as well.
  • Make sure you know about any fees attached to the loan, such as an early termination fee or origination fee, sometimes called an initiation fee. Additional fees could erase the savings from what seems like a favorable interest rate.
  • Be sure you understand the likely timetable and underwriting process, which evaluates you as a potential borrower. If you’re not clear on how it’s going to work, don’t be afraid to ask questions.
  • Some lenders have strict requirements regarding debt-to-income ratio, age, whether you’ve had a bankruptcy or foreclosure, and more. Your credit history and financial stability will be thoroughly examined. For larger loans, the lender might inquire about potential collateral
  • Once you get the loan, be sure you understand all that’s expected of you and, most important, make your payments on time.

Improving Your Credit Score for a Lower Interest Rate

Consumers with credit scores of 740 or higher get the best interest rates on debt consolidation loans. The farther down the scale your credit score is, the higher the interest rate you will pay. Anything below 660 is going to result in a high rate, though maybe not as high as the rate for credit cards you’re trying to pay off.

The steps to get a better credit score are manageable, but require discipline.

  • Pay bills on time
  • When possible, pay off your balance every month, or at least make minimum payment
  • Set up automatic payments to make sure you don’t miss one
  • Keep credit card balances at less than 30% of your credit limit
  • Don’t sign up for new credit cards
  • Look for mistakes on your credit report, and dispute those mistakes, if there are any.

This won’t be easy, but if done effectively, it will raise your credit score and lower the interest rate you pay on a consolidation loan.

Best Ways to Consolidate Debt

There are four major ways to consolidate debt: bank loan; credit card balance transfer; debt management program and personal loan.

Each one has positives and negatives, so examine them closely. It is important to know about fees or penalties for things like late payments, balance transfers or early payoffs.

Here are the highlights of the four options:

  • Bank Loan — Relatively simple. You borrow enough from the bank to pay off all your debts and negotiate for an interest rate that will help reduce your monthly payments. Now you deal with one lender — the bank.
  • 0% Interest Credit Card Balance Transfer — Many credit cards offer 0% interest for an introductory period of 12-18 months. It can be efficient to transfer your debt to a 0% card, but only if you pay off the balance before the introductory period expires. Qualifying for this card requires a very good credit score.
  • Debt Management Program — Reach out to a reputable nonprofit credit counseling agency about a debt management plan. The counseling agency receives favorable interest rates from creditors that lower your interest rate and monthly payments. You make one monthly payment to the agency, which pays each of your lenders at an agreed upon rate. The debt management plan typically lasts 3-5 years. The key is consistency. By committing to the plan and not running up more debt, you can erase your problem.
  • Personal Loan — You have a simple interest rate from a bank or credit union, instead of a variable interest rate that comes with a credit card. You could consider taking a personal loan from a family member or friend, who might give you a really low rate. But don’t take advantage of the situation. Treat it like any business transaction, keep perfect records and pay on time.

There is not a one-size-fits-all strategy to credit card debt relief, but there is a universal truth. None of these plans will work if you can’t make your payments or if you string out the process to the point where you’re paying more in interest than you originally owed. Be smart. Know that the real way out of debt is to change your spending habits and develop a financial game plan where you don’t go beyond your current resources.

Low/Zero Interest Rate Credit Cards for Loan Consolidation

When you see an offer of 0% interest, it sounds too good to be true, right? But that credit card option is out there — readily available, actually — and could work to your advantage , if you qualify.

If you shop around, it’s easy to find a credit card company that offers 0% interest rate on the transfer of an existing credit card balance. These are generally introductory offers, so the interest rate changes, usually in 12-18 months. That change might be ridiculously high.

By paying attention, however, you can pay down your debt while the rate is zero. Be sure to read the fine print on zero-percent balance transfers. There usually is a 1%-3% interest fee charged on the amount transferred.

Credit scores also come into play when applying for 0% credit cards. The average credit score accepted for major 0% cards ranges from 685 (Chase) to 707 (Discover) to 736 (Citi).

Compare More Than Rates

When comparing debt consolidation plans, be sure to look at more than just the interest rates. Some loans carry an early termination fee, others have an initiation fee. These fees, sometimes not so obvious, might wipe out any savings you thought you were getting with the lower interest rate. On the other hand, some lenders also offer perks to borrows.

Here are some things to keep in mind:

  • Before doing anything, check your credit reports and scores, and make sure everything is accurate. Credit reports and scores are the financial bible for lenders and a mistake could cost you thousands in interest rates.
  • When applying for a 0% interest rate introductory credit card, make sure you can pay it off before the interest rate kicks in, or you might have an even bigger problem.
  • If you consolidate your debt onto one credit card, avoid maxing out the card’s credit limit, because that harms your credit utilization ratio, the amount you owe versus your credit limit.
  • If you’re considering a secured loan from a bank or credit union, keep in mind that you’ll be putting up a valuable item (such as you car) as collateral. The risk: If you fail to make payments, you’ll lose the collateral. The same goes for home equity loans for debt consolidation – if you don’t make payments, you could lose your house.
  • If you opt for a personal loan, use common sense. If you have bad credit, the interest rates can be outrageous.
  • If your credit score is under 600, you might have trouble qualifying for a debt consolidation loan, or even if you get debt consolidation loan with bad credit, you may end up paying more in interest than you were with the card company.
  • Remember that applying for a new line of credit, no matter which type, creates a hard inquiry on your credit report, which can lower the average age of your credit history and thus lower your credit score.
  • A new personal loan shows that you have a high level of outstanding debt, which also will lower your credit score.
  • On the other hand, adding a personal loan improves your mix of accounts. By keeping on top of payments, you establish a positive payment history, which should help your credit score.
  • Keep an eye out for special features with debt consolidation loans – some lenders offer things like direct payment to creditors, free credit score monitoring and flexibility if you experience a hardship.
  • Always look at a debt consolidation move as a way to repair your credit. Taking out a loan or getting a 0% introductory card, but then continuing to run up debt, is just going to put you in a worse spot that you were in before.

It’s also a good idea to estimate your savings on any debt consolidation option: How much will you save monthly, as well as long-term, by consolidating your debt?

Many lending sites, as well as sites that explore ways to consolidate debt, have free debt calculators that help you figure out what you’re paying now and what you would pay with a certain interest rate and loan term. It may seem like a lot of busy work, but it’s work you should do to understand what your best options are and what kind of debt consolidation would work for you.

Drawbacks to Debt Consolidation Alternatives

There are many ways to get money to pay off debt, but any debt consolidation option is going to involve some risk, so do your homework.

Here’s a look at some common debt consolidation alternatives and their drawbacks:

Debt Management Program — Taking multiple payments from several credit cards (let’s say a total of $1,000 per month) and reducing it to one lower payment (let’s say, $800 per month) always sound good. But be careful – be sure the nonprofit credit counseling agency you choose has a good track record with consumers. It should present you with a plan that lowers your interest rate and monthly payment and eliminates all debt within 3-5 years. If that doesn’t happen, back away.

New Lines of Credit/Second Mortgages — The major problem is that your home is used as collateral and if you miss payments, it could be foreclosed. The other thing to look for is fees for anything and everything the lender can think of. Make them spell out what fees you’d be paying, including an origination fee, appraisal, or any other cost.

0% Interest Rate Credit Cards — The risk is not paying off the debt during the introductory 0% interest rate period (usually 12-18 months). When that period is over, you could be facing interest rates of 18% or higher. You must be disciplined and pay the card off.

Personal Loans — It all depends on who loans you the money. If it’s a relative or friend, the relationship can sour quickly if you fail to make on-time payments and/or default on the loan. If you get it from a bank or credit union, you will pay a higher interest rate because it’s an unsecured loan, meaning no collateral to back it up.

Borrowing from Your 401(k)Borrowing from your 401(k) is another option that sounds good on the surface – you’re borrowing money from yourself, and paying yourself back. No jumping through hoops providing income statements and other documentation, or going through a vetting process. And the payments come directly out of your paycheck before you even see them. What’s not to like? But you can’t borrow more than $50,000, and if you have less than $100,000, you can only borrow half of your balance. The repayment money is also taxed, and if you don’t pay it back in five years, you pay a fine to the IRS. If you leave your job before it’s paid back, you have to pay it back or pay a penalty. And, the most important thing – that money is for your retirement and won’t be making money for you if you’re using it to pay your bills now, so it should only be a debt consolidation option if there’s no other way.

Personal Loans vs. Debt Consolidation Loans

It’s easy to get confused when considering whether to take out a personal loan or seek a debt consolidation loan.

There are subtle differences.

A personal loan can be used for any expense. It’s granted based on your credit worthiness. With a secured personal loan, there is collateral needed (such as your home or car).

According to Farmers Bank, for a $5,000 unsecured loan with a two-year term, consumers will receive an 11.25% annual percentage rate (or a $224 monthly payment).

According to Bankrate, for a $10,000 secured loan with a three-year term, consumers with excellent to good credit can receive a 4.29% APR or an approximate $297 monthly payment. With fair credit, it shoots up to 10.66% APR, or a $326 monthly payment. With poor credit, if the consumer is still being considered, it hits 25% APR (or a $398 monthly payment).

You could take out a higher loan than needed in order to cover new expenses. Personal loans are high risk, so they will be at a high cost. But when paid in full, they will significantly boost your credit score. On the other hand, there is no consolidation company working on your behalf, so the consumer must have the discipline to use the money for the debt and not for something else, which would mean the debt load you had before, as well as the payments on the new loan.

A debt consolidation loan is used specifically to pay down your debt. You’re usually working with a consolidation company that uses its experience and contacts to reduce the interest and monthly payment so you can efficiently settle your debt.

It might come with protections from previous lenders, who won’t be able to contact you once the debt consolidation company has taken over. It will have a high interest rate because it’s a high-risk loan. You are surrendering your flexibility in exchange for total control by the lender.

Speak with a Credit Counselor About Debt Consolidation Options

There are a lot of loan options out there. Don’t choose one that will leave you worse off than you began. Get at least three proposals from banks or other lending institutions. If the best offer you can find is a payday loan, walk away … quickly!  Instead of a loan, you probably need to completely overhaul your financial life.

That is why it’s wise to get a proposal from a nonprofit credit counseling agency like InCharge Debt Solutions. Credit counseling can advise you on an overall strategy to get out of debt forever and their service is free.


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