LendingTree: Compare Rates on Personal Loans for Debt Consolidation
 

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Using a personal loan to pay off debt

Debt consolidation and refinancing can allow you to secure a lower interest rate and fewer fees than your current debt has. With debt consolidation, you combine multiple debts by taking out a new loan to pay them off. The new loan should have more favorable terms than your old debts. Refinancing works the same way, except you’re only taking out a new loan in order to pay off a single debt.

Personal loans are a common type of loan borrowers use for debt consolidation and credit card refinancing. These loans typically are for $1,000 to $50,000 with repayment terms from 12 to 60 months or longer. They may be known as debt consolidation loans when used to combine multiple debts. Personal loans don’t require collateral and can come with lower APRs than you may find on other types of debt.

For example, the average APR across all open credit card accounts was 15.09% in May 2020, according to CompareCards. For personal loans, the average APR was 11.99% for borrowers with credit scores of 760 and above.

Your credit score and finances will influence the lenders and terms you may access. As different lenders will offer different loan terms and credit requirements, it’s important to compare options. You can use the LendingTree marketplace to see loan rates from up to five lenders you prequalify* with, depending on your eligibility.

Shop personal loan rates
* Prequalification doesn’t guarantee loan approval.

Benefits of debt consolidation and refinancing

Fixed repayment term

Personal loans come with a set repayment term, typically 12 to 60 months.

Potentially lower interest rate

A lower loan rate will cut down your total cost of debt repayment.

Simplify your debt

Budget for one monthly payment instead of tracking several debt payments makes juggling your money easier.

Get rid of secured debt

Secured debts like auto loans and home equity loans use your personal property as collateral. You may qualify to use an unsecured personal loan to pay off those loans, that way you won’t risk losing your personal property if you default.

Types of debt you can consolidate

  Credit cards

  Home equity loans

  Auto loans

  Personal loans

  Medical debts

  Car title loans

  Payday loans

  Other types of debt

7 steps to refinancing or consolidating debt

Debt consolidation and refinancing don’t erase your debt. But they can make repayment easier and cheaper. When you use a personal loan to pay off credit card debt or other types of debt, you’ll apply for a new loan. Here’s how you refinance your high interest credit card debt or other debt with a personal loan.
  1. Add up your debts. Add up all your high interest debt that you wish to refinance or consolidate. This will show you how large your new loan will need to be.
  2. Get prequalified. A prequalification is the amount and rate a lender may be willing to lend to you based on a soft credit check and basic information, such as the loan amount and purpose, you provide in the initial form. Using a loan marketplace like LendingTree, you can get prequalified with up to five lenders using one online form.
  3. Compare loans. Use the prequalified offers to compare the APR, prepayment period and the monthly payments of your various options. The loan with the lowest APR may offer the most savings, but you’ll also want to be sure the monthly payment fits into your budget.
  4. Apply for a loan. To get a final loan offer from a lender, you’ll have to officially apply for the personal loan. When you apply, a lender will verify your information including your credit score and your income. Most banks do a hard credit check (which may impact your credit score) when you apply.
  5. Sign the loan agreement. The loan agreements outline the terms and conditions of the loan. Many lenders will allow you to sign all the personal loan documents online.
  6. Pay off existing debts. Most often, the lender will deposit the loan proceeds into your checking account within a few days in most cases. You will use the funds to pay off your old debts. In some cases, lenders will directly pay off the credit cards or other debts for you.
  7. Make payments on the new personal loan. Once your existing debts are paid off, you will make a single fixed monthly payment toward your new debt consolidation loan.

Why comparison shopping is important

Personal loans are available from banks, credit unions and online lenders. Although you can likely find lenders locally, exploring lenders online can help you find more flexible terms and potentially lower interest rates. Further, prequalification can reveal the lenders you may qualify for as well as the terms you could get – all without dinging your credit.

Comparison shopping is key to getting your lowest rates on loans. Consider the below data, which reveals average offered APRs to borrowers within four credit bands. For each band, we also show the average APR offered to the top 10% of borrowers.

Personal loans: Average best offered APRs
Credit score Average APR (overall) Average APR (top 10% of borrowers)
760+ 11.99% 5.34%
720-759 16.24% 6.75%
680-719 20.98% 9.88%
640-679 24.89% 15.73%
Souce: LendingTree Personal Loan Offers Report, May 2020

What affects your personal loan rates

Lenders set personal loan rates based on a borrower’s likelihood of repayment. Since the loans aren’t secured, the lender cannot reclaim property if you fail to repay the loan. When a lender thinks you’re likely to repay a loan, it’ll offer a lower rate on the loan.

To understand how a bank views your financial history, it is important to focus on two numbers:

  • Your credit score is a three-digit number that represents your creditworthiness to a bank. You can see your credit score through My LendingTree, a free credit-monitoring service.
  • Your debt-to-income (DTI) ratio compares your monthly debt obligations to your gross monthly income. The lower your DTI, the more likely it is that you can comfortably take on a new debt.

Prequalify with up to five lenders today

Loan marketplaces like LendingTree can make it easy to find and compare offers from multiple lenders after you fill out one online form.

After providing basic personal information and on your loan needs, you’ll prequalify with up to five lenders within a few minutes. Compare your loan offers to help you find the lowest refinance rates available to you. If there’s a loan offer you’d like to pursue, you can move forward with a formal application, which will require a hard credit check. Prequalified offers are not loan guarantees because the lender must verify your eligibility.

How to compare personal loan offers

When you prequalify with several lenders, you can start to compare loan offers. A low APR can mean a low overall loan cost, but other factors matter, too. Here’s what to pay attention to:

  • APR: The APR is your total cost of borrowing money. A lower APR translates to a lower cost of repayment.
  • Borrowing amounts: Lenders offer different borrowing limits but usually range from $1,000 to $50,000 or more.
  • Repayment term: Personal loans typically offer repayment terms ranging from 12 to 60 months or longer. If you choose a longer term, you’ll pay more in interest over time but see lower monthly payments.
  • Origination fee: This common fee ranges from 0% to 8% of your loan amount and is your cost for taking out a personal loan. This fee is baked into the APR and is deducted from funds before loan disbursement or added on top of your balance.
  • Discounts: The advertised APR on a loan may include discounts for things like setting up autopay. Be sure you can handle the requirements before borrowing.

APR vs. interest rate: The difference matters

When you start comparing loan offers, you may be confused to see both an interest rate and an APR, or annual percentage rate. The interest rate is only the amount a lender charges you to borrow money. Interest rates are expressed as percentage rates. The APR, however, is the total cost of borrowing money, including fees such the interest rate and origination fee, expressed as a percentage. That’s why the APR on a loan is usually higher than the interest rate and is a better measure of your loan cost.

Improve your credit to access better loan rates

Borrowers with bad credit may qualify for personal loans to pay off debt, but the best rates on personal loans go to borrowers with great credit scores. While it takes time to build good credit, there are steps you can take to improve your credit and potentially access better rates over time:

  1. Make on-time payments: The most important factor in a credit score is your payment history. Paying all your debts on time, every month, will help you build credit.
  2. Keep credit lines open: Even if you’re not using a credit card, for example, keep the account open. The unused credit will decrease your overall credit utilization which shows lenders you are a responsible borrower. Additionally, an older credit card increases your average credit history length.
  3. Only apply for new credit when you need it: Applying for new credit will lead to inquiries on your credit report which will temporarily impact your credit. Avoid applying for credit until you’re ready to take out a new loan.
  4. Dispute errors on your credit report: Errors on your credit report can drag down your credit score. You can dispute credit report errors on your own, without paying a fee.