Select Page

Best Debt Consolidation Loan Interest Rates [2020 Update]

Dan Steadman

Financial Advisor, MoneyBeagle

Typical Debt Consolidation Loan RatesA Basic Introduction to Debt Consolidation

If you are looking for an effective way to get a handle on your personal debt, debt consolidation is a popular option for finding a streamlined approach to paying down loans. In order to consolidate all of the debt that you owe to different lenders, you take out an additional personal loan from a bank in the total amount of your debt. You will pay an interest rate on the personal loan that is typically lower than the total interest you would be paying for each individual loan.

If you think that you are a good candidate for the best debt consolidation companies, one of the first things you will want to know is your current credit score. This is the single biggest factor in determining how much you could pay for your interest rate, which is crucial for determining how long it will ultimately take you to pay off your total debt amount.

What to Expect for Typical Debt Consolidation Loan Rates

If you are considering a personal loan to consolidate your debt, you will want to invest some time in shopping around for the best interest rate that you can get. This is crucial because rate offers can change daily and vary widely across different financial institutions. Your rate may also depend on other facts, such as the total amount of debt you seek to refinance and the length of your proposed loan term.

If you have an excellent credit score, you might be able to find a personal loan option in the amount of $10,000 for as low as 4.29 percent. However, if you have a low credit score, you could end up paying as much as 25 percent for a personal bank loan for the same amount. In addition to that concern, you may not even end up getting approved with a credit score that is well below average.

There is a common misconception that you can damage your credit score by applying for a personal loan and having your credit score check. This is not exactly true if you apply for a personal loan online. In that case, you would only have a soft check of your credit score because the lender would only be providing you with an estimate of what you could qualify for. If you actually decide to go through with the personal loan, then you would have your exact credit score pulled, which may be reflected as a slight ding in your credit score. However, you can offset that decline by decreasing your total debt obligation and making monthly payments consistently on time.

Other Factors for a Debt Consolidation Loan

While your interest rate is certainly important, you should also ask about any origination points charged by the lender in offering your loan. This could scale back any gains you get from a lower interest rate by actually charging more for your overall loan.

Prepare Yourself for Interest Rates

Debt consolidation offers customers relief from the common double-digit interest rates imposed by credit card companies and other lenders. Borrowers who take advantage of debt consolidation loans can shave off 5% or more on their debt interest payments. There’s even bigger savings for people who have good credit ratings and exceptional credit histories – they can save as much as 10%.  Moreover, if borrowers pay the same amount they did when they were still paying off multiple loans, they will be able to finish their consolidated much faster.

Before you dive right in and get a debt consolidation from a bill consolidation company, it’s a good idea to learn more about its mechanics and fine print. This will help borrowers like yourself make informed choices and find the best debt solution for your situation. There’s no one-size-fits-all solution for debt consolidation. The rates and terms may vary depending on the amount you need and your credit score.

Fixed Rates and Variable Rates

For borrowers, it is not a requirement to be completely familiar with debt settlement plans and interest rates. It’s just useful to have a working knowledge of how interests are computed and what the surcharges will be in case you miss your scheduled repayment. This will help you manage your finances better.

In some instances, the creditors offer auto debit payment options to ensure that due dates are met. If you feel that this option will be better for you, you can make the arrangements with your creditor immediately after you sign up for the debt consolidation loan. Let’s take a look at fixed rate loans first. As the name implies, this type of loan offers a flat or constant interest rate for the entire term of your loan. This means that no matter how much inflations rate balloon, your payments will remain constant because the interest rate isn’t affected by prevailing market conditions. For example, take a look at current rates for Discover debt consolidation loans.

On the other hand, variable rate loans have interest rates which can change from time to time. When the interest rates change to adjust to market trends, the minimum payment you have to make for your loan also increases or decreases depending on how the market has moved.

If you decide to avail of a debt consolidation loan, you can choose either a variable or fixed rate one. If completely unsure, it would be best to seek the help of an experienced credit counsellor or a company that offers that kind of service.

Debt Consolidation Loan Types

A credit card consolidation loan can come in several different ways. While loans are classified as either fixed rate or variable rate, they are further divided into classes:

  1. Home Equity Line of Credit or HELOC – a HELOC is a type of secured loan that is based on the equity in your home. This is a type of variable interest loan that has a revolving line of credit. The downside is that it is usually not extended to people who have a history of bad credit or low credit score. Once you’ve already paid a portion of your loan, that sum becomes available again for you to borrow. This is why a HELOC is considered revolving credit, similar to credit cards. Most lending companies don’t offer revolving credit. They normally give borrowers a fixed amount which they must repay monthly and over a fixed period of time. In fact, some companies charge a pre-termination fee if you decide to pay off your loan ahead of schedule.
  1. Home Refinance Loan – a home refinance loan can have either a variable or fixed rate of interest. The reason why a lot of people refinance their homes and borrow more than the amount they need is because they want a less expensive mortgage for a normally high-interest debt.
  1. Second Mortgage – after the stock market crash, a lot of homeowners took out a second mortgage. This basically means borrowing money based on the value of the equity in your home. This is on top of your first mortgage. Therefore, you will be paying for two mortgages each month. However, this is a risk worth taking if you can lobby for a substantial decrease in your interest rates. Second mortgages are either fixed or variable in interest rates.
  1. Consumer Loan – A consumer loan is a personal loan that is not secured by an asset. While many people have consumer loans that they must pay off in order to avoid bankruptcy or a consumer proposal, a consumer loan may be a good consolidation loan for you if you qualify and can get a good interest rate. Consumer loans can have a fixed rate of interest or a variable rate of interest.

Setting Interest Rates for Debt Consolidation Loans

Interest rates are pegged depending on how prime interest rates as well as stocks and bonds are moving. Banks set the variable rate on debt consolidation loans by taking the current prime rate and adding a set amount. Fixed rate mortgage loans, on the other hand, are influenced greatly by the bond market. Banks take into consideration the going rate for bonds and add one or two % to it.

How Do You Know if Debt Consolidation is For You?

While it may be easy for anyone to get a consumer loan, know that it takes commitment to see it through the end. This is why borrowers should compare and analyse the different options presented to them instead of jumping at the first loan offered to them.  It should be noted that interest rates are determined based on the person’s credit history information, current credit score, market rates and the lender’s own rates.

Maintaining a strong credit score is important because it is one of the primary factors lenders use to determine your interest rates. Even if you don’t take out debt consolidation loans, credit scores still affect personal bank loans, auto loans and even housing loans. Essentially, there’s no way out of it. Your credit score is something creditors will always be looking at no matter what kind of financial product you will be needing years down the road.

Lenders also have a say in how charges and interest rates are computed. It’s natural for companies who lend money to have stringent requirements for people who want to borrow money from them. In the event that the borrower defaults on the loan, the lending company will have to shoulder the amount as a loss. The process of trying to recover money is also tedious since this sometimes involves legal action. Lawyers are expensive and it can take a while before they get their money back, if they do at all.

In turn, the lenders give the borrower who defaulted on his loan a poor credit score rating so he or she will have a much tougher time obtaining a loan in the future.

Borrowing from family and friends may sound like a good idea because there’s no interest on the money you are loaning. Read more: How to consolidate credit card debt on your own? This may be good for one or two times in your life, and if the amount of money you are borrowing is small. The problem with this set up is the person you borrowed the money from expects you to return the money within a short period of time. It’s not going to be as long as a loan you can get from a real lender which can extend for three years, on the average.

This arrangement only works if you only need the money for a short time and if you have the money to pay them back immediately. Otherwise, personal relationships may suffer and you will end up in a lawsuit with a close personal friend or family member. That certainly isn’t an ideal scenario to be in.

Debt Consolidation Laws are Helpful

Debt consolidation laws cater to a certain niche: people who have multiple existing loans. A debt consolidation loan basically reduces the amount of interest that an individual is paying on multiple debts. This is ideal for people who are facing difficulties with all the debts they are trying to pay. If you think about it, the lender who offers a borrower this kind of loan is putting himself at a great risk. The person is already in debt in the first place and is struggling to pay off existing ones. If he takes out a big loan in order to pay off the others, what guarantee does the lender have that the borrower won’t default on this loan as well?

The situation is pretty complicated. Fortunately, most lenders have a system to determine if a borrower can make the payments on debt consolidation loans bad credit or not. Before they are granted a debt consolidation loan, their histories are checked and weighed against their employment status, their household income, and so on. The borrowers are also given credit counselling and financial management seminars to help them remove unnecessary expenditures from their budget. These measures will also help them get back on their feet and actually save money once they have finished paying their debts.

Debt consolidation loans are here to help people. As a borrower, you will have to commit to making your monthly repayments and pay them on time. Just think of it as a second chance to pick yourself up and get back in the game again. If you're in the service then you may want to look into military debt relief if there is an option for that.

Dan Steadman

Dan Steadman

Financial Advisor, MoneyBeagle

Dan is one of the top financial experts when it comes to debt consolidation. With more than 20 years of experience helping people tackle debt, he has a unique insight when it comes to solving debt-related problems. 

Dan got his start when he went to work for a bank after getting his Business Degree. He worked his way up and became a loan officer. This position gave him unique insights into the ways that financial products work and how people can utilize different financial products to improve their lives. He’s seen hundreds of success stories and just as many failures – so he knows what steps are most likely to help his readers.

Get out of Debt Today