What "best" means depends on your debt and your finances
There is no single best consolidation loan because the right choice depends on how much you owe, what interest rate you can get, how long you want to repay, and whether you own a home. A loan that works well for someone with $8,000 in credit card debt and a steady job will not work for someone with $40,000 in debt and variable income. The sections below walk through the main types of consolidation loans and what to look for in each one.
Before you compare loans, know your credit score and the total amount you want to consolidate. Lenders use your credit score to decide whether to lend to you and what interest rate to offer. The higher your score, the lower your rate will typically be. You can check your score free through AnnualCreditReport.com or through your bank's website.
Key Takeaways
- Personal loans from banks, credit unions, and online lenders typically have fixed interest rates and repayment terms of three to seven years, and do not require collateral.
- Home equity loans and HELOCs use your house as collateral, which means lower interest rates but also the risk of losing your home if you cannot repay.
- Balance transfer cards can move high-interest credit card debt to a card with a 0% introductory rate, but the promotional period usually lasts 6 to 21 months and a transfer fee applies upfront.
- Your credit score, total debt amount, and monthly budget all affect which loan type will cost you the least and fit your situation best.
- Comparing offers from at least three lenders takes 15 to 30 minutes and shows you the real monthly payment and total interest you will pay over the life of the loan.
Personal loans: fixed rates and no collateral required
A personal loan is money you borrow from a bank, credit union, or online lender and repay in fixed monthly installments over a set period, usually three to seven years. The interest rate is fixed, meaning your payment stays the same every month. You do not pledge any asset as collateral, so the lender's only recourse if you do not pay is to report the missed payment to credit bureaus and potentially pursue legal action.
Personal loans work well for consolidating credit card debt because the monthly payment is predictable and the interest rate is usually lower than credit card rates. A person with a 720 credit score might pay 8% to 12% on a personal loan, compared to 18% to 24% on a credit card. The tradeoff is that you commit to a fixed repayment schedule — you cannot pay less one month and more the next without penalty.
Banks, credit unions, and online lenders all offer personal loans. Credit unions typically have lower rates for members with good credit, but require membership. Online lenders often approve faster and accept lower credit scores, but may charge higher rates. Banks fall in the middle on both speed and rates. Get quotes from at least one of each to compare.
Home equity loans and HELOCs: lower rates, higher stakes
If you own a home, a home equity loan or HELOC (home equity line of credit) lets you borrow against the value of your home. Both use your house as collateral, which means lenders will offer you a much lower interest rate than a personal loan — often 5% to 9% depending on your credit and the current market. The difference in monthly payment can be substantial.
A home equity loan works like a personal loan: you receive a lump sum and repay it in fixed monthly payments over a set term, usually 5 to 15 years. A HELOC works like a credit card: you receive a credit line and draw from it as needed, paying interest only on what you use. During the draw period (usually 5 to 10 years), you pay interest only. After that, the repayment period begins and you pay principal and interest.
The critical risk is that if you do not repay, the lender can foreclose on your home. This makes a home equity loan or HELOC dangerous if your income is unstable or if you are consolidating debt because you overspend. If you take out a home equity loan to consolidate credit cards and then run up the cards again, you now have two debts instead of one, and your home is at risk.
Balance transfer cards: 0% for a limited time
A balance transfer moves your credit card balance to a new card that offers a 0% introductory interest rate for a set period, usually 6 to 21 months depending on the card and the issuer. During that period, your payment goes entirely toward principal instead of interest, which can save you hundreds of dollars. After the promotional period ends, the regular interest rate kicks in, typically 15% to 25%.
Balance transfers work best if you have high-interest credit card debt, a decent credit score (usually 670 or higher), and a realistic plan to pay off the balance before the 0% period ends. Most cards charge a transfer fee of 3% to 5% of the amount transferred, which is added to your new balance. If you transfer $5,000 at 4%, you owe $5,200 on the new card.
The math only works if you can pay down the balance faster than you would on your current card. If you transfer $5,000 and pay $200 a month, you will pay off the balance in 25 months. If the 0% period is 18 months, you will pay interest for the last 7 months. Calculate the payoff time before you explore.
Debt management plans: working with a nonprofit counselor
A debt management plan (DMP) is an agreement between you and a nonprofit credit counseling agency. The agency contacts your creditors and negotiates a lower interest rate or waived fees. You then make one monthly payment to the agency, which distributes the money to your creditors. The plan typically lasts three to five years.
A DMP is not a loan — no new money changes hands. Instead, you are reorganizing your existing debts and usually paying less interest. The agency does not charge you upfront; they receive a fee from your creditors. This makes a DMP worth exploring if you have multiple debts and a credit score too low to may have access to for a personal loan at a reasonable rate.
The downside is that creditors are not required to accept a DMP, and some will not. Also, enrolling in a DMP shows on your credit report and can lower your credit score initially. However, as you make on-time payments, your score usually recovers. Look for an agency accredited by the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association (FCA).
How to compare loans side by side
When you get a loan offer, the lender must provide a document called the Loan Estimate within three business days of your process. For personal loans and balance transfers, the key numbers are the interest rate (APR), the monthly payment, the loan term, and the total interest you will pay over the life of the loan. Compare these across at least three offers.
Use an online calculator to check the math yourself. Enter the loan amount, interest rate, and term, and the calculator will show you the monthly payment and total interest. This takes two minutes and confirms that the lender's numbers are correct. Many lenders' websites have built-in calculators.
Do not explore to multiple lenders on the same day if possible. Each process triggers a hard inquiry on your credit report, which can lower your score slightly. However, credit scoring models treat multiple inquiries for the same type of loan (like personal loans) within 14 to 45 days as a single inquiry, depending on the scoring model. Space your applications out over a week or two to be safe.
Red flags to watch for
Avoid any lender that asks for an upfront fee before approving your loan, charges a fee to process your process, or guarantees approval before pulling your credit. Legitimate lenders do not charge upfront fees. They make money from the interest you pay, not from process fees.
Be cautious of lenders that pressure you to decide quickly or claim that an offer is only good for 24 hours. Reputable lenders give you time to read the terms and compare offers. Also avoid any lender that suggests you take out a larger loan than you need or that does not clearly explain the interest rate and monthly payment before you sign.
If a lender is not registered with your state's financial regulator or does not have a physical address and phone number you can verify, research them thoroughly before explore. The Consumer Financial Protection Bureau (CFPB) website lets you search for complaints against specific lenders.
Frequently Asked Questions
Will consolidating my debt hurt my credit score?
Yes, initially. A hard inquiry and a new account will lower your score by a few points. However, as you make on-time payments and your credit utilization drops (because you paid off credit cards), your score typically recovers within a few months. Over time, consolidation usually helps your score because you are paying down debt and showing a pattern of on-time payments.
What if I have bad credit and cannot get a personal loan?
A credit union personal loan, a debt management plan, or a home equity loan (if you own a home) may be options. Credit unions often lend to members with lower scores. A DMP does not require a loan approval. A home equity loan uses your home as collateral, so credit score matters less, but the risk is higher. You can also work on raising your credit score before explore — paying down credit card balances and making all payments on time will improve your score over three to six months.
Can I consolidate student loans with a personal loan?
Yes, you can use a personal loan to pay off federal or private student loans, but you will lose federal protections like income-driven repayment plans and loan forgiveness programs. Only consolidate federal student loans this way if you have explored federal consolidation options first through StudentAid.gov. For private student loans, a personal loan may be a reasonable option if the interest rate is lower.
How long does it take to get a personal loan?
Most online lenders fund within one to three business days after you sign the loan agreement. Banks and credit unions typically take three to five business days. Some online lenders can fund the same day, but this is less common. Factor in the time to compare offers and make a decision — the whole process usually takes one to two weeks from start to finish.
Should I pay off the consolidation loan early?
Yes, if you can afford it without creating a financial hardship. Paying early reduces the total interest you pay. However, check the loan agreement first — some loans charge a prepayment penalty, though this is rare with personal loans. If there is no penalty, paying extra toward principal whenever you can will shorten the loan term and save money.