Ready to Consolidate? How to Get the Best Loan Rates

Average loan rates are highly dependent on a few key factors
Last updated Aug 30, 2021 | By Miranda Marquit

FinanceBuzz is reader-supported. We may receive compensation from the products and services mentioned in this story, but the opinions are the author's own. Compensation may impact where offers appear. We have not included all available products or offers. Learn more about how we make money and our editorial policies.

When you’re struggling with how to pay off debt, one way to get things under control is to use a debt consolidation loan. A consolidation loan can get everything in one place, so you only have one payment to worry about. Plus, if you can get a lower interest rate, you can save money on your debt and be free of it much faster.

If you’re hoping to put together a plan to tackle your obligations, here’s what you need to know about getting the best debt consolidation loan rates.

Average Debt Consolidation Loan Rates

Consumers pay, on average, 18.56% APR on debt consolidation loans, according to a study by ValuePenguin. However, what rate you actually end up with depends on a number of factors, including your credit score. It’s possible to get a rate as low as 5% APR with some lenders, while at the same time you could also end up paying nearly 30% APR in other circumstances.

Debt consolidation loan rates vary widely because there’s so much that goes into deciding what rate you end up with. As a result, it’s important to carefully review your rate before accepting a loan offer. You want to make sure that your debt consolidation loan will actually save you money.

I used a debt consolidation loan in the past, and, even though I had to pay 9.99% APR, it was still better than paying credit card interest rates. For me, it was a good deal, but everyone has to decide for themselves if consolidating loans makes sense for them.

How Debt Consolidation Loan Rates Are Determined

When deciding what rate to give you on a debt consolidation loan, a lender will consider a variety of factors, including:

  • Your credit score
  • Income
  • Type of debt you plan to consolidate
  • Amount of debt you’re consolidating
  • Loan term

Your credit score is the biggest factor in determining what loan rate you end up with, but the other items matter as well. Remember: most debt consolidation loans are unsecured. Lenders won’t be able to go after some type of collateral if you default.

As a result, your interest rate is a reflection of the risk the lender thinks you represent. If the lender feels that you’re likely to pay off the loan, you’ll end up with a lower interest rate. On the other hand, if there are signs that you might be more likely to default, you’ll pay a higher interest rate so the lender gets what they can up front.

For instance, the current average interest rate for consumers with excellent credit (720 - 850) is between 4.52% – 20.57%, according to ValuePenguin. While those with poor credit (300 - 639) runs between 15.06% – 36.00%, although it should be noted that most lenders require you to have a minimum score of 580 or higher in order to qualify.

Tips for Getting the Best Debt Consolidation Loan Rates

If you think a debt consolidation can benefit you financially and strategically, you’ll want to get the best possible rate. Here are some tips that can help you get the best deal.

1. Improve Your Credit Score

The better your credit score, the lower your interest rate (and the more money you’ll save). You can see rates below 5% APR if you have excellent credit, and in the 7% APR range if you have good credit. If you have a few months to improve your credit score before applying for a debt consolidation loan, you could see much better rates.

2. Consider a Shorter Loan Term

With a three-year loan, you could see a lower rate right that’s lower by right around 0.50% as compared to a five-year loan. Try for a seven-year loan, and you could wind up paying even more interest.

The faster you can afford to pay off your loan, the lower your rate is likely to be since lenders will appreciate the fact that you have less time for something to go wrong.

3. Proof of Stable Income

One of the reasons I didn’t get the best interest rate on my own debt consolidation loan, even though I had excellent credit, was because I had my own business, rather than working for someone else. If you can show that you’ll get a paycheck regularly, you’re more likely to see a bit of leeway in your interest rate.

4. Shop Around for the Best Rates

Just as you can get a good price on household goods by shopping around, you can get a better deal on your debt consolidation loan if you shop around for the best rates. Provide your information to different lenders to see what rates they offer.

Do Debt Consolidation Loans Hurt Your Credit?

Anytime you get new credit, you’re going to see a slight impact on your credit score. This is because hard credit inquiries for new credit can bring down your score by a few points. Additionally, a new loan changes the average age of your credit history, so that can have a small impact as well.

However, these small changes to your credit score are usually easy to overcome after a couple of months. And, if you have good credit, a drop of a few points probably won’t hurt your overall credit situation.

Another thing to consider, especially if you’re paying off credit cards with your debt consolidation loan, is that you might free up more room on your revolving lines. As a result, your credit utilization ratio goes down, giving your score a boost. And, as long as you don’t run up new credit card bills or miss payments on your new debt consolidation loan, your credit should actually improve as time goes by.

The biggest risk is if you add new debt after consolidating your smaller loans. If you spend more, you could end up finding it harder to get out of debt. Plus, if you miss payments on your new loan, that will hurt your credit. But, if you’re responsible and careful about debt consolidation, your long-term credit score shouldn’t be harmed by debt consolidation.

Bottom Line

If you’re looking for the best debt consolidation loan rates, it’s a good idea to shop around before you start missing payments on your current debts. You can have a good credit score, even if you have debt. So look for a consolidation loan before you get into trouble.

With a good score, and a debt repayment plan, you should be able to get a decent rate on your debt consolidation loan, saving you money and getting out of debt that much faster.

Freedom Debt Relief Benefits

  • Recommended for debts $27,000 and higher
  • Resolve your debt in as little as 24 - 48 months
  • They've helped save their clients over $10 billion
  • Over 600,000 customers and counting

Author Details

Miranda Marquit Miranda Marquit has been covering money for more than a decade and is a nationally-recognized financial expert and journalist, appearing on CNBC, NPR, Forbes, Yahoo! Finance, FOX Business, and numerous other outlets.