How To Use a Personal Loan for Debt Consolidation

Debt consolidation involves taking out a loan at a lower interest rate to pay off high-interest debts like payday loans and credit cards. You can use a personal loan for debt consolidation if you qualify for a lower rate on this loan than what you’re currently paying.

When you take out a personal loan to consolidate debt, you’ll also simplify repayment since you’ll have a single payment each month instead of multiple bills. Read on to learn more about how these loans work, how to apply, and our recommendations for the best debt consolidation loans.

5 Best Personal Loans for Debt Consolidation

We reviewed 20 personal debt consolidation lenders based on a number of factors, such as loan amounts, credit score requirements, terms, annual percentage rates (APRs), and customer reviews, to determine our recommendations for the five best consolidation loans.

1. Reach Financial

• Loan Amounts: $3,500 to $40,000
• APR: 5.99% to 35.99%
• Loan Terms: 24 to 60 months
• Minimum Credit Score: Not Specified

Reach Financial is our top choice for borrowers who need quick access to funds. Once your personal loan consolidation application is approved, funds are available within 24 hours. Another reason why Reach is the best debt consolidation loan lender is its rock-bottom low annual percentage rate (APR) of 5.99% on approved loans for its best borrowers. If you have very good to excellent credit (750 and above), this may be a solid choice.

Pros

• Lowest available APR for borrowers with very good to excellent credit
• Loaned funds can be disbursed directly to your lenders, making consolidation quicker and more convenient
• Borrowers can change payment due date

Cons

• You may have to pay an origination fee of up to 8%
• Lowest rates are only available to those with excellent credit

2. LightStream

• Loan Amounts: Up to $100,000
• APR: 6.99% to 25.49%
• Loan Terms: 24 to 84 months
• Minimum Credit Score: 700

LightStream offers one of the best loans for consolidating debt due to high loan amounts and longer repayment terms. While you’ll need good credit to qualify for the lowest rates, the company does offer some of the lowest rates on personal loans.

LightStream doesn’t charge an origination fee for its personal loan, but there’s no option for borrowers to prequalify before applying.

Pros

• No loan origination fee
• High maximum loan amounts
• Quick funding

Cons

• You’ll need good to excellent credit to qualify
• Borrowers can’t prequalify to see their chances of getting approved before applying

3. Upstart

• Loan Amounts: $1,000 to $50,000
• APR: 7.80% to 35.99%
• Loan Terms: 36 to 60 months
• Minimum Credit Score: 300

If you have bad credit and are looking for the best loan for debt consolidation, Upstart is a good choice. With a minimum credit score requirement of just 300, almost any borrower can qualify for a personal loan from this lender. Keep in mind that you’ll likely pay a higher interest rate with a lower credit score.

Other than the high APRs, you may also have to pay an origination fee of up to 12%, which is much steeper, compared to the other options on our list.

Pros

• Quick approvals
• Lowest minimum credit score requirements compared to nearly all other lenders
• You may be able to qualify even if you have no credit history

Cons

• Steep origination fees of up to 12%
• No joint loans with a co-borrower are allowed

4. Discover

• Loan Amounts: $2,500 to $40,000
• APR: 7.99% to 24.99%
• Loan Terms: 36 to 84 months
• Minimum Credit Score: 720

Discover Bank offers personal loans to consolidate debt without any prepayment penalty or origination fees. It can also pay your lenders directly. Borrowers can manage their loans through an easy-to-use mobile app.

However, the minimum credit score requirement of 720 may make it harder for many borrowers to qualify. The loan process is easy and straightforward, and funds are usually available in your checking account on the next business day.

Pros

• Convenient mobile app to manage loans
• No prepayment penalty or origination fee
• Multiple ways to make loan payments
• Quick approvals and funding

Cons

• No joint loans are allowed
• High minimum credit score requirements

5. SoFi

• Loan Amounts: $5,000 to $100,000
• APR: 8.99% to 29.99%
• Loan Terms: 24 to 84 months
• Minimum Credit Score: 680

SoFi frequently features on our list as one of the best personal lenders for debt consolidation overall due to its high loan limits, no late fees, and competitive loan rates.

While the lowest rates are available for borrowers with a solid credit profile, you can add a co-applicant to improve your chances of approval. Keep in mind that you may have to pay an origination fee of up to 7% for the lowest APRs.

Pros

• Offers joint loans
• No late payment fees
• High maximum loan limits

Cons

• You may need to pay an origination fee for the lowest rates
• You’ll need good credit to qualify for SoFi’s debt consolidation program

Can You Use a Personal Loan for Debt Consolidation?

You can use a personal loan for debt consolidation, and it's often the most common option when compared to other options like using your 401(K) to pay off debt, balance transfer credit cards, or borrowing against your home equity.

With unsecured personal loans, you don’t need collateral to apply. They also offer a lot of flexibility since the loan funds can be used for any purpose, including paying off high-interest debt.

Pros and Cons of Using a Personal Loan for Debt Consolidation

Debt consolidation offers a number of benefits, especially if you qualify for a lower rate. However, it's also important to be aware of the risks involved.

Pros

• You’ll have a single payment each month, which simplifies finances and makes it easier to be debt-free.
• You can use the funds to pay off medical bills, home improvement loans, and many other types of debt.
• You may be able to save a considerable amount of money if you qualify for lower APRs.
• A fixed payoff date makes it easier to pay off debt.
• Your new monthly payment may be lower when compared to all your current payments put together.
• Making on-time payments each month may help you improve your credit score.

Cons

• There may be additional costs involved, such as origination fees, late fees, and prepayment penalties.
• You may not qualify for competitive rates if you don’t have good credit.
• You may pay more in interest over the life of the loan if you choose a longer repayment term.
• You may end up in a worse financial position if you continue to use your credit cards once you pay off the balance.

How To Consolidate and Pay Off Debt With a Personal Loan?

There are two main ways to consolidate debt with a personal loan. Some lenders will directly pay off your creditors on your behalf once your loan application is approved. If this type of loan option is not available, you’ll receive the loan proceeds in your bank account and can then use the funds to pay off your loans and credit card balances.

Here’s an example to illustrate how you can consolidate multiple debts with a personal loan to save money.

Current Debts:

• Credit Card 1: Balance $10,000, APR 17.99%, minimum monthly payment $250
• Credit Card 2: Balance $7,500, APR 19.99%, minimum monthly payment $200
• Credit Card 3: Balance $6,500, APR 18.99%, minimum monthly payment $170

If you qualify for a debt consolidation loan of $24,000 at an APR of 13.25%, with no origination fees and a term of five (5) years, your monthly payment will be $549.15. This fixed-amount consolidation loan payment is $71.86/month lower than the payments of your three credit card debts combined, which comes to $621/month. 

Over the life of the debt consolidation loan, compared to paying off your credit cards over the same time period of 5 years, you’ll be able to save $4,348.94 in interest charges. You can use an online debt consolidation calculator to determine how much you can save.

How To Compare Lenders and Find the Best Personal Loan for Debt Consolidation

Here are some important factors to consider when comparing different lenders to find the best option available to you:

• Different lenders have different APR ranges. We recommend comparing the rates advertised by different lenders and prequalifying for a personal loan to find the best consolidation loan rates.
• Check the lender's minimum and maximum loan limits to ensure you can borrow enough to consolidate your debts.
• Learn more about the lender’s minimum credit score requirements, debt-to-income ratio, and other qualification requirements.
• Use a loan calculator to see how different repayment terms will impact your monthly payment as well as the total interest you’ll pay over the life of the loan. This will allow you to pick the right term for your loan.

How To Qualify for a Personal Loan for Debt Consolidation

The qualification requirements for personal loans for debt consolidation will vary for each lender. However, these are the things that most lenders will usually look at when evaluating your creditworthiness:

• Credit Score: Most lenders will require a “good” (670+) to “excellent” (780+) credit score for personal loans. While you may be able to qualify with a lower score, you’ll usually pay a higher interest rate.
• Credit History and Current Loans/Debts: Lenders will also take a look at your overall credit report and check for things like liens, foreclosures, bankruptcy filing(s), late payments on your current loans, as well as the type and amount of other debts you may owe.
• Income: Lenders may request your income details to calculate your debt-to-income ratio and ensure that you can repay the loan.

How To Apply for a Personal Loan for Debt Consolidation

Here’s how to apply for a personal loan for debt consolidation:

• Check your credit score to ensure you’ll be able to qualify for the loan.
• Get a debt payoff statement for your current debts to estimate what loan amount you’ll need.
• Shop around and compare loan offers to find the best option for your profile. Prequalify to see what rates you may get before you start the application process.
• Gather relevant documents like your tax returns, pay stubs, and bank statements.
• Fill out the loan application and submit it.

Alternatives To Personal Loans for Debt Consolidation

If you don’t qualify for a personal loan to consolidate debt or if you don’t think it’s the right option for you, consider these alternatives:

• Balance Transfer Credit Cards: If you have excellent credit (typically 780+), you may qualify for a 0% APR card. The introductory period is usually 12 to 18 months, and if you pay off your entire balance within that period, you’ll be able to save a considerable amount of money.
• Home Equity Loans: You’ll qualify for lower interest with a home equity loan, but you also risk losing your home to foreclosure if you fall behind on payments.
• Home Equity Line of Credit: A home equity line of credit or HELOC allows you to borrow as much as you need during the draw period. However, it’s a form of secured loan that uses your home as collateral, so we don’t recommend using this option unless you’re sure you’ll be able to repay.

Apply for a Personal Loan for Debt Consolidation Today

A personal loan for debt consolidation can be a viable option to pay off your existing high-interest debts, but only if you’re able to qualify for a lower rate than what you’re currently paying. Make sure to compare the costs carefully to ensure you’ll be able to save money.

If you can’t qualify for debt consolidation due to bad credit, we recommend enrolling in a debt management program (DMP) offered by a credit counseling agency. DMPs can consolidate your debt but don’t involve taking out a new loan.