Personal loans are flexible financial tools that are becoming more popular. You can apply for a personal loan for nearly any purpose, including consolidating your existing debts.
If you have a lot of debt, you might feel like you’re buried under minimum payments.
The stress of managing multiple loans and bills each month can be a lot to handle. You might also have extremely high interest rates on some of your loans, making them very expensive to pay back.
Consolidating your existing loans into one new loan leaves you with just one monthly payment to make. It can also reduce your interest rate, helping you save money.
Best Personal Lenders for Debt Consolidation
Though there are a large number of lenders that offer personal loans, some lenders offer better deals than others.
These are the lenders that offer loans that are best for debt consolidation.
Earnest is a personal lender that touts its ability to gauge the risk of its borrowers more accurately than other lenders can.
That means that Earnest can approve loans that other lenders won’t. It also means that Earnest can charge less interest and fewer fees.
Earnest does this by analyzing your credit score, and other data such as your saving patterns, investments, and career trajectory. If your career is just getting started and you have a bright future ahead of you, that can help you get a loan from Earnest.
You can borrow as little as $5,000 or as much as $75,000 through Earnest. There’s no origination fee, early payment fee, or other hidden fees.
Earnest Personal Loans Pros & Cons
SoFi is an online lender that offers low-cost, highly flexible personal loans. SoFi will lend as much as $100,000 or as little as $5,000, so you can borrow exactly enough to consolidate your existing debt.
You also don’t have to worry about many of the most common personal loan fees at SoFi. You won’t be charged any origination fees, early payment fees, or other hidden fees.
As an additional benefit, SoFi offers you some protection against job loss. In most cases, you need to make your monthly payments, no matter what your personal situation is. If you lose your job, you still have to make monthly payments.
At SoFi, if you lose your job, you can pause your monthly payments. Interest will continue to accrue, but your credit won’t take a hit if you stop making payments. This can reduce some of the stress of borrowing money.
SoFi Personal Loans Pros & Cons
Lending Club is an online peer-to-peer lending website that offers personal loans to its users.
Peer-to-peer lending sites do not directly lend money to borrowers. Instead, they connect potential borrowers with people who are interested in investing in personal loans.
When you apply for a loan on Lending Club’s site, the anonymized details of your loan will be posted for investors to see.
These investors can decide whether they want to fund your loan and can contribute as little as $25 to your loan. Once your loan is funded, you’ll get the money you need.
When you make your monthly payments, the money will be split between the people who helped fund your loan.
One of the main reasons to use Lending Club is that it offers loans to people with a wide range of credit quality. Your loan will carry a high interest rate, but you should be able to get a loan if you need one.
Lending Club Personal Loans Pros & Cons
How to Choose a Personal Loan for Debt Consolidation
When you’re looking for a personal loan to consolidate your existing debts, you’ll mainly be looking at three factors.
Generally, you want to use a personal loan that has a lower interest than the debt being consolidated or refinanced.
If you do consolidate to a loan with a higher rate, you’ll wind up paying more in the long run.
Obviously, the lower the rate you can get, the better.
Maximum Amount and Loan Term
There’s no point in borrowing money to consolidate your debts if you cannot borrow enough to consolidate your existing debts.
If you have $125,000 in debt, and can only find lenders willing to lend $50,000, you’re not going to be able to consolidate your debt into a single new loan.
You should also look at the maximum the that the lender offers. Longer term loans cost more but result in lower monthly payments.
If your goal is to minimize your monthly payments, at a higher cost overall, look for a lender with long-term loans.
A great way to pick the right loan, amount, and term, is by using our personal loan calculator to help you figure out your possible monthly payments and accrued interest:
Fees add to the cost of your loan. Many personal loans charge origination fees, which are added on to the balance at the start of the loan.
Some also charge fees if you pay the loan back ahead of schedule.
Common Personal Loan Fees
|Type of fee||Typical cost|
|Application fee||$25 to $50|
|Origination fee||1% to 6% of the loan amount|
|Prepayment penalty||2% to 5% of the loan amount|
|Late payment fee||$25 to $50 or 3% to 5% of monthly payment|
|Returned check fee||$20 to $50|
|Payment protection insurance||1% of the loan amount|
These fees can eat into the savings you get from consolidating your debt.
Look for a personal lender that charge low or no fees.
Why a Personal Loan is Better Than a Balance Transfer Credit Card
There are a few reasons to consolidate your debt with a personal loan rather than a balance transfer credit card.
Higher borrowing limit
One reason to use a personal loan is that personal lenders tend to offer much larger loans than credit card issuers will.
You’ll be hard-pressed to find a card issuer that will give you a $100,000 limit like SoFi would.
This is especially true if you’re looking into debt consolidation because it’s likely that you have less than perfect credit.
There’s no point in consolidating your loans unless you can borrow enough to consolidate all, or at least most of them. That makes the higher limit offered by personal loans important.
Lower interest rate
Many balance transfer credit cards advertise 0% interest rate periods.
These can help you save a lot of money, but only if you can pay the loan off in full before the promotional period ends.
If you still have a balance when the 0% interest rate period ends, the credit card’s interest rate will revert to its usual rate.
Credit cards can charge interest in excess of 20% APR. If you have good credit, you can find a personal loan with interest rates that are less than a third of that.
If you plan to take more than a year or so to pay back all of your debt, you’re better off with a personal loan.
Balance transfer fees
Most credit cards charge a balance transfer fee equal to a percentage of the balance you transfer -- usually around 3%.
Many personal lenders offer loans with no fees.
How to Improve Your Chances of Approval
There are a few ways to improve your chances of getting approved for a debt consolidation personal loan.
Raise your credit score
The biggest factor in your application’s approval is likely to be your credit score.
Your credit score is a numerical representation of your financial trustworthiness in the eyes of lenders.
The most important of these factors is your payment history. The amount of money that you owe is the second most important.
The bad news is that your payment history takes a long time to improve. The only way to improve it is to pay your bills on time over the course of years.
In the short term, the best way to boost your credit score is to pay down your existing debts and avoid using your credit cards in the lead up to your loan application.
Other factors for application
Almost every lender will look at your credit when making a lending decision, some lenders will look at more than just your credit score.
One example of this is Earnest. Earnest takes things like your savings pattern and investments into account to try to gauge your financial trustworthiness.
If you have poor credit but have recently worked to improve your finances, look for a lender who will take that into account.
Rate discounts for automatic payments
The goal of consolidating your debts into a personal loan is to save money and get a more manageable monthly payment.
Remember that you can often get an interest rate discount by signing up for automatic payments.
Most banks that offer both checking services and personal loans will offer this.
Sign up for automatic loan payments from your connected checking account and you can save as much as 0.25% off the interest rate of your loan. This will reduce both your monthly payment and the total cost of your loan.
Alternatives to Debt Consolidation
Sometimes, as much as you try, you cannot get approved for a debt consolidation loan.
Here are other ways that you can tackle high-interest debt:
When you're struggling to pay off debt, you can take a chance at negotiating with the creditor to explore different options for your specific case.
The creditor may offer to set up a payment plan that is more manageable for your finances.
Credit counseling is a service where counselors review your finances to identify ways to improve your debt situation.
Counselors may also take action to negotiate with creditors on your behalf in order to establish a debt management plan that is realistic for you.
Debt settlement is the process in which the creditor agrees to discharge your debt as long as you pay a portion of the amount owed.
This is usually a more drastic step where you've already missed payments but want to eliminate the debt entirely from your name. The creditor may prefer to collect some of the owed balance instead of selling the debt to a debt collection agency.
Note: Debt settlement usually shows up on your credit report and could lead to a big drop in your credit score (if it has already fallen significantly due to missed/late payments).
The extreme method of clearing yourself of a ton of debt is bankruptcy.
Generally, you'd want to avoid bankruptcy if possible because your financial record will be in ruins.
Through bankruptcy, you may discharge all of your consumer debts.
If you have a lot of debt, consolidating your debts into one loan can make them easier to manage and help you save money.
If you want to consolidate your debt, consider using a personal loan to do so.