Many who find themselves in credit card debt look to consolidate that debt, both to minimize the interest that is charged, and to simplify their debt by having one payment per month, versus several payments to several credit card companies. However, what is a good interest rate on a debt consolidation loan? There are many factors that contribute to the interest rate on personal loans, so a good interest rate will vary widely depending on the borrower and the lending institution.
Credit Scores Matter
Most lenders require a credit score of 580 or higher before you can be approved for any sort of debt consolidation loan, or personal loan. The average interest rate on a two-year unsecured personal loan is 9.34%, per the Federal Reserve. However, the lower your credit score, the higher your interest rate will be if you are approved for a debt consolidation loan. The range of interest rates varies typically from 8.31% to 28.81%, so that leaves a lot of room for consideration when applying for a personal loan.
Interest Rates Are Just the Beginning
Debt consolidation loan interest payments, loan initiation fees, and prepayment penalties are all matters that you should consider when thinking about getting a debt consolidation loan. In some cases, it may be both cheaper and smarter for you to simply start aggressively paying off your debt, versus incurring new fees, such as loan initiation fees. Also, you don’t want to extend the loan term out too far, or you’ll end up paying more in interest than you would have by simply paying off the initial set of debts you had in the first place.
There Are Fees to Consider Too
When you are considering a debt consolidation loan, it’s important to remember that there can be loan initiation fees incurred that are anywhere from one percent to five percent of the total loan amount. Additionally, some lenders have a prepayment penalty clause, which means you’ll be charged additional fees simply for paying your loan amount off early.
These factors can cost you major dollars when you reach what you may have thought was the conclusion of the debt consolidation loan. This is why it’s important to read that ever-present fine print to see what they’re required to tell you that they hope you won’t bother to try to know.
Is Debt Consolidation Your Best Option?
Unless the annual percentage rate that you receive on the consolidation loan is lower than the weighted average of your current debts, you may want to avoid taking on a debt consolidation loan at this point. Instead, you’ll be better served if you focus on improving your credit score and paying down the balances on the debts that you currently have.
Many charts that will give you an approximate percentage rate that you can receive on a debt consolidation loan, based on your current credit score. However, rather than relying on that information, remember lenders take more than just your credit score into account when providing you with a personal loan.
All of these factors should be evaluated before you apply for a debt consolidation loan so that you can decide whether taking the loan is worth it for your personal financial situation. An experienced consolidation company like Bills.com, will have done the research and looked at debt consolidation lenders over a variety of factors. They’ll be able to inform you regarding interest rates, fees, repayment terms, and customer service. This is why it’s a good idea to check with multiple lenders to get the loan that best meets your situation.