Personal Loans for Debt Consolidation: How to Compare Lenders

The best personal loans for consolidation are the ones that lower the total cost of your debt, not just the monthly payment. The right lender for you depends on your credit, the amount you owe and how quickly you can pay it off. Instead of a one-size-fits-all ranking, this guide shows you the features that separate a good consolidation loan from a poor one, and how to compare offers so you pick the best one for your own situation.

How a Consolidation Loan Works

A debt consolidation loan is a personal loan used to pay off several other debts, usually credit cards. You then make one fixed monthly payment to one lender. It saves money when the new APR is lower than the average rate on the debts you pay off, and when the term is not so long that extra months of interest cancel out the saving. Our guide on whether personal loans are worth it to pay off debt explains when consolidation helps and when it does not.

Features That Make a Consolidation Loan Stand Out

1. A low APR for your credit profile

The APR is the most important number. It combines the interest rate with certain fees. Compare APRs across lenders using your actual prequalified offers. Do not rely on the advertised "as low as" rate, which only the strongest applicants receive.

2. Low or no origination fee

Many lenders charge an origination fee, often taken out of the loan before you receive it. On a consolidation loan that matters, because you need enough cash to pay off every balance in full. If a fee is deducted, you may need to borrow slightly more, which adds interest. A lender with no fee and a slightly higher rate can sometimes be cheaper overall. Run both through a calculator.

3. Direct payment to your creditors

Some lenders will send the loan money straight to your credit card companies. This saves you a step and removes the temptation to use the cash for something else. Some also offer a small rate discount for choosing direct payment. Ask whether the lender offers it and how many creditors it can pay.

4. Term choices that fit your plan

Look for a lender that offers a range of terms. A shorter term means a higher payment but less total interest. A longer term lowers the payment but can make the loan more expensive than your current debt. Pick the shortest term with a payment you can comfortably afford.

5. Loan amounts that cover your balances

Add up every balance you want to consolidate. Check that the lender's maximum covers that total, and that its minimum is not above what you need.

6. No prepayment penalty

You should be able to pay extra or pay off the loan early without a fee. That way any raise, bonus or tax refund can go straight toward cutting your interest.

7. Soft-pull prequalification

The best lenders let you check your rate with a soft credit inquiry, which does not affect your score. That lets you compare several offers before a single hard inquiry.

8. Helpful extras

Autopay discounts, flexible due dates, hardship programs and responsive customer service all make a loan easier to live with over several years.

Which Type of Lender Fits You Best

Good to excellent credit. Banks and online lenders tend to compete hardest for these borrowers. Compare several and look for no-fee loans with direct payment to creditors.

Fair credit. Credit unions and online lenders that accept fair scores are the best places to start. Expect higher APRs and possible origination fees. If your score is near 580, our guide to the best personal loans for a 580 credit score covers your options.

Bad credit. A consolidation loan may not save money if the only offers carry very high APRs. A secured loan, a co-signer, or a debt management plan from a nonprofit credit counseling agency may work better. See our guide to borrowing with a less than perfect credit score.

How to Compare Consolidation Offers Step by Step

1. List your debts. For each one, write down the balance, APR, monthly payment and months left.
2. Work out your current total cost. Estimate how much interest you will pay if you keep paying as you do now.
3. Prequalify with a few lenders. Use soft-pull checks with two to four lenders.
4. Check the cash you actually receive. Subtract any origination fee and confirm it still covers every balance.
5. Compare total repayment. Use our free personal loan calculator to see the payment and total interest for each offer, and compare that with your current path.
6. Choose the lowest total cost with an affordable payment. Not simply the lowest payment.

A Simple Way to Judge the Saving

Suppose you owe money on three cards. Add up the interest you will pay on them if you continue your current payments. Then look at the total interest on the consolidation loan over its full term, plus any fee. If the loan total is clearly lower and the monthly payment fits your budget, the loan is doing its job. If the totals are close, the only benefit is having one payment instead of three. That can still be useful, but it is not a financial saving.

Mistakes That Undo a Good Consolidation Loan

• Running the cards back up. Once the cards are paid off, their limits are free again. If you use them, you end up with the loan and new card debt.
• Choosing the longest term for the lowest payment. This can mean paying more interest than before.
• Forgetting the fee. An origination fee can leave you short of the amount needed to clear every balance.
• Confusing a loan with debt settlement. Debt settlement firms negotiate to pay creditors less than you owe. That is not a loan. It can damage your credit, and it usually involves fees.
• Paying upfront to "qualify." The Federal Trade Commission warns that legitimate lenders do not guarantee a loan before reviewing your application.

Before You Apply

Check your credit reports for free at AnnualCreditReport.com and dispute any errors. Paying down a card balance or two before you apply can lift your score and lower your rate. Our guide on improving your credit score before a loan covers the quickest steps. Our comparison of personal loans and credit cards explains when a balance transfer card might be cheaper than a loan.

When you are ready, you can check your offers through our matching service. There is no hard credit check at the matching stage.

The Bottom Line

The best personal loan for consolidation is the one that clears all your balances at the lowest total cost, with a payment you can keep up. Look for a low APR for your credit, little or no origination fee, direct payment to creditors, flexible terms and no prepayment penalty. Compare offers on total repayment, not the monthly figure. And once the old balances are paid, close the door on new card debt.