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What Rates You Can Expect For Debt Consolidation Loans

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Dominique Broadway
What Rates You Can Expect For Debt Consolidation Loans

Debt consolidation involves combining outstanding debts into a single monthly payment.

The most common types of debt that people consolidate is unsecured debt like credit cards, unpaid medical bills, and private student loans.

A major item to consider is debt consolidation loan interest rates. If the consolidation loan does not carry a lower interest rate than your current debt, there is little reason to consolidate. The interest rate you receive depends on several factors:

  • Credit Score: The lower the credit score the higher the rates
  • Financial Situation: The lender needs to know you will have the financial resources to pay off your loan
  • Term: Longer terms means higher interest rates

Why You Must Shop Around

To access the best possible rate, it is important to explore several different lenders and determine which one offers the best terms. Some lenders are more risk-averse than others, meaning they will offer higher interest rates to those with bad credit. 

For example, those with an excellent credit score can likely consolidate $10,000 of debt at an interest rate of 5%-6%. Those with a poor credit score, such as 600 or lower, may end up with debt consolidation rates as high as 25%.

Other lenders specialize in offering loans to people with less than stellar credit. These types of lenders will usually offer better interest rates than traditional brick and mortar banks. 

The Rates

The most important factor a lender uses to determine the interest rate for a loan is an applicant's credit score. While every lender may have slightly different criteria, the general ranges are true across almost all lenders. 

It is important to note that other factors, such as term, debt-to-income (DTI) ratio, and an applicants' monthly income, will also contribute to the lender's decision. Any aspect that increases risk will also increase the interest rate.

Credit ScoreAverage Interest Range
Excellent (720 - 850)4.52% - 7.63%
Good (680-719)6.67% - 11.88%
Fair (640 -679)7.05% - 18.53%
Poor (300 - 639)15.06% - 26.15%

Fixed Vs Variable Rates

Anyone considering a consolidation loan should know the difference between fixed and variable interest rates.

With fixed rates, the interest rate a borrower receives when they are issued the loan will be the rate carried for the entirety of the loan.

This is in contrast to variable interest rates which fluctuate depending on market conditions. A variable-rate loan will generally increase in cost if market conditions improve and will decrease if they decline. 

Best Consolidation Loan Rates

As outlined above, criteria such as credit score, yearly income, debt-to-income ratio, and total outstanding debt are major factors used to determine an applicant's interest rate.

While this is true, interest rates can vary widely from lender to lender with the most established lenders usually offering the best rates. 

Below are three of the top lenders for debt consolidation.

  • Discover: Discover is one of the most well known personal loan companies. It offers competitive rates (6.99% - 24.99%) and flexible payment options. Its minimum credit score requirements is a bit higher than most other lenders at 660.
  • SoFi: This lender is especially popular amongst college grads because of its low student loan consolidation rates, ranging between 5.99% and 18.99%. SoFi is also known for granting larger loans to individuals than other lenders but requires a much higher credit score. While no minimum score is outright stated, it has been reported that a minimum score of 680 is needed to qualify.
  • LightStream: The appeal of LightStream is pretty straight forward: quickly approved loans at good rates (4.99% - 16.79%). LightStream is a good option for those whose credit score is 660 and above.

Things To Keep In Mind

There are often other costs associated with loans which should always be considered. Recognizing these extra fees can help determine the overall price of a loan.

  • Origination Fee: A fee charged by the lender for processing a new loan. They are usually 0.5% - 1.0% of the total price of the loan.
  • Fine Print: Some lenders will charge fees or insurance costs for missed or late payments. Read the fine print.
  • Terms: It is important to understand the terms of the loan. The Schumer box is a table that all lenders are required by law to supply to borrowers. It clearly outlines key items such as interest rates, grace periods, annual fees, and other vital details.

Conclusion

A debt consolidation loan is one of the best strategies for getting unsecured debt under control.

In almost all cases, a lower interest rate than one’s current debts can be achieved which could mean thousands of dollars in savings.