What is the average debt consolidation loan rate?

Young man sitting in cafe holding a credit card and looking up debt consolidation loan rates on his laptopImage: Young man sitting in cafe holding a credit card and looking up debt consolidation loan rates on his laptop

In a Nutshell

A debt-consolidation loan lets you merge multiple debts into a single, new loan and could simplify and possibly lower your monthly payment amount. You can also use funds from a personal loan to consolidate debt, but interest rates can vary widely depending on the type of loan you take out, your credit and the loan terms.
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When you shop around for a debt-consolidation loan, you might find the rates vary widely from lender to lender.

There are many options for those looking to consolidate debt, including a home equity loan, a balance transfer credit card or a personal loan. Interest rates will vary by lender, but the difference in these rates can depend largely on the type of debt-consolidation loan, your credit and other factors. Generally, the better your credit, the more likely you may be to get approved for a lower interest rate.

Here’s some important info to know about debt-consolidation loans, and what could help you get approved for the best debt-consolidation loan for you.

What is a debt-consolidation loan?

A debt-consolidation loan merges multiple debts, like credit card balances, into one new loan, with one monthly payment and a potentially lower interest rate.

Some debt-consolidation loans may be secured (like a home equity loan) or unsecured (like a personal loan). With secured loans, the borrower is required to provide collateral, like a home or savings account, to secure the debt. The lender can take the asset to satisfy the debt if you stop making payments. But unsecured loans don’t require collateral.

Will you save money with a debt-consolidation loan? Maybe. A lower interest rate, a longer loan term or a combination of both could help lower your monthly payment.

But if you extend the loan term and only make minimum payments, you may actually end up paying more in interest over the life of the loan. Also watch out for additional costs and fees that you may need to pay as a part of a debt-consolidation loan.

Debt-consolidation loan rates

Many factors influence debt-consolidation loan rates, including the type of loan you apply for. Generally, you can find lower interest rates on secured loans than on unsecured loans.

As of August 2020, the average interest rate on a two-year personal loan from a commercial bank was 9.34%, according to Federal Reserve data. But keep in mind that personal loan APRs can range from 7% to 36%, depending on your credit and other factors.

The average credit card interest rate as of August 2020 was 16.43%, according to the Fed’s data.

You’ll typically need strong credit and a low debt-to-income ratio to qualify for the lowest rates.

Credit cards

Balance transfer credit cards allow you to move several credit card balances onto one credit card. These may come with an introductory 0% APR period, which usually lasts for a specific period of time, typically in the range of 12 to 21 months. You should aim to pay the balance in full during the promotional period because after the intro period is up, you’ll have to pay interest and fees on the remaining balance.

Home equity loans

With a home equity loan, you can borrow a lump sum and pay it back over time with interest. Because you’re tapping into your home as collateral, home equity loans may offer lower interest rates than other types of loans. But if you default on the loan, you could be at risk of losing your home.

What factors affect my debt-consolidation loan rate?

Several factors can affect your debt-consolidation loan rate. The type of product you’re looking at can dramatically impact your rates — for example, personal loans have different rates and fees than credit cards. But several other factors can impact your rates as well.

Credit and credit scores

Generally, strong credit could help you qualify for lower interest rates. But if you have a few recent missed or late payments on your credit reports, consider taking the time to work on improving your credit before applying for a debt-consolidation loan. Remember, your credit is only one of many factors that can determine your interest rate.

The lender

Although you can find debt-consolidation loans at traditional banks, credit unions or online lenders, each may charge a different rate. You can generally find lower APRs at credit unions when compared with traditional banks, but you’ll need to be a member of a credit union to apply for a loan from one. Some online lenders market to people with bad credit. But interest rates can vary widely, from around 6% up to 36%, whereas the range is typically lower with a bank personal loan.

Debt-to-income ratio

Your debt-to-income ratio, or DTI, is how much of your monthly gross income (before expenses) that you put toward paying debts. Generally, lenders equate higher DTIs with higher risk. If your DTI is high — around 43% or higher — then you might find it difficult to get approved for lower interest rates.

Loan term

A loan term is the amount of time you have to repay a loan. In general, a shorter-term loan will offer lower interest rates and reduce your overall cost because you’re paying interest for a shorter period. Longer loan terms, on the other hand, typically offer higher interest rates and a higher total cost, but they may also mean a smaller minimum monthly payment.

Fixed vs. variable APR

A fixed interest rate may get you a higher interest rate to start with, but is more likely to remain steady during your loan term. Variable interest rates may start lower but can increase over time based on changes in the market.

Bottom line

Multiple sources of debt-consolidation loans can make it hard to pin down a single average debt-consolidation loan rate. It’s important to shop around to ensure you’re comparing options for the credit product that will work best for you. Applying for prequalification can help you get an idea of what loans and rates you might qualify for — just remember that it doesn’t guarantee that you’ll be approved, or that the terms you’re offered will be the same as those you prequalified for.

It’s also important to address how you ended up in debt — and in need of a debt-consolidation loan — in the first place. If you find it helpful, you may want to consider credit-counseling options if you’re having trouble paying off debts.

About the author: Kim Porter is a writer and editor who has written for AARP the Magazine, Credit Karma, Reviewed.com, U.S. News & World Report, and more. Her favorite topics include maximizing credit card rewards and budgeting. Wh… Read more.