A debt consolidation loan can help simplify your finances and possibly save you money.
Getting a debt consolidation loan allows you to make one payment rather than paying multiple creditors. You also can potentially save thousands of dollars in interest payments if you qualify for a debt consolidation loan that has a lower interest rate than your high-interest credit cards.
Banks, credit unions and online financial institutions offer debt consolidation loans and personal loans to qualified buyers. With so many options, it can be hard to know where to begin and which option best meets your financial objectives. We created this guide to help walk you through the most important factors to consider when searching for a lender to consolidate your debt.
7 Factors to Consider When Choosing a Lender
Choosing the right lender for your debt consolidation loan is important for several reasons, which we’ve outlined below. These guidelines may help you get the best interest rate, lowest fees, and most flexible repayment terms when shopping for a debt consolidation loan.
Interest Rates
We placed interest rates at the top of our list because it’s one of the most important aspects of a personal loan for debt consolidation. To qualify for the best interest rates, you should have a good credit score. If you have fair or bad credit, your interest rate will be higher. Lower interest rates can save you thousands of dollars in interest payments over the life of the loan.
Here’s an example:
Melissa Martinez, vice president of lending at Greater Nevada Credit Union in Northern Nevada, said interest rate is the overriding factor when shopping for a debt consolidation loan.
“Interest rate, and what it’s going to do to your monthly payment, is huge,” Martinez said. “If you are currently paying $500 a month, and a debt consolidation increases your payment $1,000 a month, does that make sense? It depends on your goals and affordability. If your goal is to completely get out of debt, and you can afford that higher payment, great. But if it doesn’t, maybe you need to look at other options.”
When searching for a debt consolidation loan, compare interest rates among lenders before signing any paperwork. It could make your loan much more affordable each month and in the long run.
Fees and Hidden Costs
Borrowers with exceptional credit (FICO score 800 and above) may receive no-cost offers for personal loans. Borrowers with very good (FICO score 740-799) and good (FICO score 670-739) credit scores may receive loan offers with fees baked in. These can include:
- Application fee
- Loan origination fee
- Prepayment penalty
- Late payment fee
Application fees are usually a fixed-cost fee, while loan origination fees are one-time payments that are usually assessed as a percentage of the total amount borrowed.
Here’s an example:
- A $20,000 loan with a 3% loan origination fee would cost $600, leaving you with a total of $19,400 unless it’s added to the total amount borrowed.
These fees can reduce your borrowing power and increase the total cost of the loan. Be sure your lender is completely transparent on upfront fees and hidden costs such as administrative charges or a prepayment penalty so you know exactly how much your loan will cost now and in the future.
Loan Terms
Loan terms—the predetermined length of time you agree to pay back the money you borrow—are another extremely important consideration. Terms vary by lender and typically range from one to five years. Shorter repayment periods mean you’ll pay much less in interest, but you’ll also have much higher monthly payments than longer-term loans.
Here’s an example:
Choose a loan term that aligns with your monthly budget and helps you meet your financial goals.
Loan Amount Limits
Lenders have different limits on personal loans for debt consolidation. Some may cap total borrowing limits at $50,000, while others may offer debt consolidation loans up to $100,000.
It’s important to note that personal loans are generally unsecured debt (no collateral is required to back the loan), so only the most creditworthy borrowers will qualify for these exceptionally high loan limits. You’ll want to choose a lender that offers a loan limit that meets your financial objectives and remains in your ability to repay the loan.
Approval Criteria
Debt consolidation loan lenders have different qualification criteria. Your credit score is one of the most important approval factors since a high FICO score demonstrates continued fiscal responsibility.
Income is another factor that many lenders look at. Verifiable income from a full-time job that’s documented on a Form W2 carries much more weight than 1099 income from freelancing or gig work.
Your debt-to-income ratio, or the amount of existing debt you are servicing compared to your existing income, is another key factor. If you are already over-leveraged (debt is greater than income) you likely will not qualify for a very large personal loan.
Make sure you know the answers to all these qualifying criteria prior to applying for a debt consolidation loan to improve your chances of getting approved. Prospective lenders will likely do a hard credit check, and having a lot of credit inquiries will damage your FICO score.
Flexibility in Repayment Options
Most loans have concrete terms: You borrow a set amount at a fixed interest rate and make the same monthly payment until the loan matures.
Some lenders may offer flexible repayment options, which can be handy if you ever have a dip in income that makes it difficult to meet your loan obligations. Flexible repayment options could include skipped payments with no penalty, interest-only payments, or recasting the loan after a certain amount of the principal balance has been paid down. It’s important to note that these options usually increase the length of time you have the loan, so your goal of eliminating debt takes longer to reach. However, they can be an important lifeline in times of financial hardship.
Reputation and Customer Reviews
Who doesn’t look at online reviews before making a big purchase? Online reviews aren’t gospel, and everyone’s experience isn’t the same, but they can give you a good indication of customer satisfaction.
Check online review sites and the Better Business Bureau prior to inking any documents, especially for lesser-known financial institutions. A little bit of early research can help you steer clear of less-favorable lenders, as well as help guide you toward lenders with strong customer service and customer satisfaction ratings.
5 Warning Signs of a Lender to Avoid
Taking out a personal loan for debt consolidation shouldn’t be a frustrating or difficult process. The majority of lenders will offer straightforward loan terms and conditions that are easily understood. Lenders who raise any of the red flags below should be avoided, because they may be engaged in predatory lending.
Unusually High Interest Rates
Interest rates on personal loans are largely determined by creditworthiness, so interest rates should roughly fall in the same range depending on your credit score. There can be variations, of course — one lender’s offer may have an 8.99% rate, for example, while another’s is 11%.
If you get an offer with an exceptionally high rate, while all other offers are all significantly lower, it would be best to pass on that unfavorable offer. Remember, higher interest rates mean higher monthly payments and more money paid in interest.
Lack of Transparency
When searching for personal loans, you should be able to see all terms and conditions upfront before you ever sign any paperwork. Loan amounts, approval criteria, loan repayment terms and all fees should be extremely clear.
Make sure to avoid any lenders that leave you in the dark about fees or any other relevant information. A misstep here could leave you with a sour taste for months on end.
Pressure Tactics
An unfavorable personal loan could leave you in a worse financial situation than you already are in. Predatory lenders may use pressure tactics to get unsavvy consumers to sign unfavorable loan offers. Reputable lenders, meanwhile, will walk you through every step of the prequalification and approval processes and are happy to discuss your payment options.
Greater Nevada’s Martinez said that before taking out a debt consolidation loan, you should take a deep dive into your personal finances to truly understand your financial situation.
“People should look at their monthly debts and create a budget,” Martinez said. “They should look at the interest rates they are currently paying on their loans or credit cards so they can make a more educated decision on which debt consolidation loan is best for them.
“Obviously they are not looking to increase how much they are going to be repaying, so they need to have all that information to be able to make that decision,” she added. “At Greater Nevada, we talk to borrowers. If your monthly payment is going to go up, does that make sense? We talk to borrowers about pain points and discuss other options.”
Bad Customer Service or Reviews
Taking some time to do an online search of prospective lenders — especially lesser known online lenders — can save a great deal of hassle and anguish. Lenders with hundreds of negative reviews about customer service or unfavorable loan offers should raise a red flag and should be avoided.
No Clear Physical Address or Online Presence
Financial institutions that don’t have brick-and-mortar locations should still have their headquarter office location listed on the “contact us” page of their websites for mail correspondence. Legitimate financial institutions will make this information and other contact details easily available.
3 Important Aspects of a Good Lender
In the “old school” days of banking, customers formed relationships with bankers that they could leverage when they needed financial help, such as taking out a debt consolidation loan or getting approved for a mortgage. Things have changed with the advent of online banking, but these three aspects of a good lender are still important.
Transparency
Good lenders provide clear communications about loan terms, limits, fees and repayment options. You should be able to discuss each aspect of your loan prior to signing any documents.
Flexibility
Good lenders want you to succeed, not fail. A good lender may offer options such as flexible repayment terms you can use if you ever find yourself in a difficult financial situation, or they should be willing to work with you to find a solution to your financial hardship so you can still meet your loan obligations.
Reputation
Some banks and credit unions, especially smaller regional institutions, often have strong reputations within their communities. These financial institutions are no less qualified than banks with a national footprint – and in many cases, you may find they have more favorable reviews and fewer complaints from dissatisfied customers.
Look at the Hard Data Before Taking Out a Debt Consolidation Loan
We’ve given you a long list of factors to consider when searching for the best debt consolidation loan. While “soft” factors such as reputation and transparency are important, the concrete factors such as loan terms, interest rates and repayment options are truly what will make your personal loan a positive experience.
Do the legwork. Compare loan offers, research financial institutions to learn more about other customers’ experiences, and stay away from any lenders that raise red flags. Lastly, look for a lender that’s willing to discuss your financial situation and strategize a financial gameplan.
“My focus is ensuring customers or members have the best experience possible and are truly helping themselves,” said Greater Nevada Credit Union’s Martinez. “That’s what sets us apart from online lenders and competitors; we truly care about the greater good of the individual and not just getting the loan done. We want to get loans done, but we also want to take care of our people.”
