Best Debt Consolidation Loan Companies

Alessandro Rebucci

Professor, economics, Johns Hopkins Carey Business School

Debt consolidation loans are for people who want to consolidate multiple high-interest debts into a single, more manageable and lower-interest loan. This option, when available, simplifies tracking payments and saves you money — lowering the overall interest rate on your balance.

Brent Clark

Professor, business strategy and entrepreneurship, University of Nebraska Omaha

Debt consolidation loans only make sense for people who either want to simplify their life a little or want to lower their combined interest payments across all their debts (or both).

If you have many high-interest debts, such as credit card balances and medical bills, and are struggling to manage their payments, then debt consolidation might be a good idea for you. If you are having difficulty keeping track of a large number of different payments and end up paying late on some of them, your credit is going to suffer. Consolidating those into a single payment can be a time-saver and a credit-saver, and the potential to lower the amount of interest you pay is a clear advantage.

Scott Collins

Professor, accounting, Penn State Smeal College of Business

First, we’re talking here about consolidating multiple loan payments into one single loan payment. We’re not talking about the consumer debt relief industry. With that said, it’s a bit of a misconception to suggest that personal debt consolidation loans are great for people who have a high amount of outstanding debt. It’s not necessarily the total amount of outstanding debt which makes a debt consolidation loan attractive. It’s the nature of the debt and the variance of the loan interest rates which can make a debt consolidation loan an attractive option for someone.

For instance, if someone is currently carrying balances on multiple consumer credit cards, each with a different variable interest rate, then consolidating these balances into one personal loan with a fixed (and presumably lower) interest rate can help them pay off these balances in a more predictable period of time.

Alessandro Rebucci

Professor, economics, Johns Hopkins Carey Business School

First, a debt consolidation option has to be available. This is typically the case if credit card debt is contracted during periods of hardship (e.g., spells of unemployment or during crises), and once things improve — perhaps because of a new job — bank credit becomes available. Another possibility is when people refinance a mortgage in a cash-out refinancing operation. This is the best way to consolidate more expensive loans but presupposes that one has a good credit rating and owns a house.

Fan He

Professor, finance, Central Connecticut State University

Debt consolidation is a good idea when you can qualify for a consolidation loan that offers a lower or equal overall interest rate. You should factor in associated expenses like origination and annual fees compared to the rates on your current debts slated for consolidation.

However, qualifying for lower interest rates often requires meeting high requirements, such as a good credit score, a reasonable debt-to-income ratio and credit card balances below a certain threshold. If a borrower is already overextended in debt, consolidation loans usually carry significant costs that make them not worthwhile and could potentially worsen the borrower’s financial situation. The major benefit of a consolidation loan is to allow the borrower to simplify debt management if they have multiple debt payments to keep track of; by establishing a single fixed monthly payment plan, it reduces mental load in managing debt.

Brent Clark

Professor, business strategy and entrepreneurship, University of Nebraska Omaha

Make a list of all of your debts. For each, write down the debt amount and the interest rate on that debt. Then compare those rates to the rate you can get with a debt consolidation loan. If you are paying a higher interest rate on one or more of your debts than what you could get on a consolidation loan, then you should seriously consider it. If the dollar amount is small enough on those high-interest debts, it might not be worth the effort, especially if you can pay those specific debts off quickly. But if the dollar amount is significant, get some rate quotes on a consolidation loan, and go for it.

Scott Collins

Professor, accounting, Penn State Smeal College of Business

First, understand that debt consolidation is not a predatory lending practice. Consolidating your personal debt is not the same as entering into a debt relief agreement, which is a practice where an agency negotiates on your behalf with lenders to reduce the amount you owe to those lenders. Debt consolidation combines the full balances of each of your personal loans by pooling them together into one single loan payment.

Next, know that debt consolidation is not intended to degrade your credit score. You might see an initial (and temporary) decrease in your credit score, but only because you submitted a loan application, and the submission of that application triggered a hard inquiry against your credit record. Any initial decrease that you might notice in your credit score as a result of consolidating your debt should be recoverable within a few months … after making on-time payments for your new consolidated loan and after your credit record reflects the full payment of the other debt that was consolidated into your new loan.

Alessandro Rebucci

Professor, economics, Johns Hopkins Carey Business School

Beware of the advisory fees involved. Make sure that the total interest payments due after consolidation are less than without consolidation. For example, an only slightly lower rate to be paid for a much longer period will result in a higher — rather than lower — debt burden.

Fan He

Professor, finance, Central Connecticut State University

Before committing to a debt consolidation loan, it's important to explore other debt consolidation options with potentially lower costs, such as balance transfer credit cards. When assessing debt consolidation loans, it's also important not to be simply swayed by the promise of lower monthly payments. Some loans may offer an appealingly lower payment plan but at a significantly higher interest rate than your current debts, often achieved by using a longer repayment period. This can result in significantly higher total interest payments and, depending on your financial planning strategies, undermining rather than supporting your efforts toward effective debt management.

Brent Clark

Professor, business strategy and entrepreneurship, University of Nebraska Omaha

1. Request at least two quotes, though three or four would provide a more comprehensive comparison of rates.
2. Don’t take out any new debt. The point of a debt consolidation loan is to get things under control. Stop accruing new debt or it will be pointless to do this.
3. Pay on time every time.

Scott Collins

Professor, accounting, Penn State Smeal College of Business

By taking advantage of a personal debt consolidation product, you might be able to secure a loan that consolidates, or pools, your multiple personal loan balances into one single loan payment. The interest rate on your new single loan payment might end up being lower than the weighted average interest rate for your (previously) multiple loan payments. And instead of worrying about multiple payment dates for each of your outstanding loans, you can achieve some peace of mind by only having to worry about one payment date for your new consolidated loan.

One key piece of advice is to shop around before formally applying for a personal debt consolidation loan. Know your credit score before you shop. Then you can view potential interest rates for your particular credit score before submitting a loan application — which will trigger a hard inquiry against your credit record.

Another key piece of advice is to consider what, if any, collateral the bank might be asking you to pledge against your proposed personal consolidation loan. The pledging of collateral might help to reduce the interest rate of your consolidation loan, but the risk that is introduced with a collateralized loan is something that you should consider before entering into such an agreement.

Alessandro Rebucci

Professor, economics, Johns Hopkins Carey Business School

[Debt consolidation loans makes sense] when changed circumstances like lower rates or higher income give you the opportunity to access better lending products. For example, secured borrowing against a new job paycheck might be significantly cheaper than credit card debt or unsecured loans.

Brent Clark

Professor, business strategy and entrepreneurship, University of Nebraska Omaha

Debt consolidation loans are most likely to be helpful if you have been improving your credit score recently. If your credit is about the same as it has always been, it’s not as likely a new consolidation loan will be much of an improvement for your situation. That said, if you’ve made poor choices and have one or more debts with very high interest rates, even with bad credit, a debt consolidation loan could be an improvement.

Scott Collins

Professor, accounting, Penn State Smeal College of Business

One key benefit of a personal debt consolidation loan is to reduce the number of debt payments that you are making each month. By consolidating multiple sources of debt into one loan, you then make only one payment — to one lender — instead of making multiple payments to multiple lenders. This can help reduce the stress involved with remembering to make payments to multiple lenders.

Another key benefit of a personal debt consolidation loan is the presumption that one fixed interest rate is more predictable than multiple variable interest rates. Especially if that single fixed interest rate ends up being lower than the weighted average of the other variable interest rates. So depending on the terms of the personal debt consolidation loan, you might be able to reduce your total monthly debt payment and increase — albeit slightly — your monthly cash flow. And regardless of the terms of the personal debt consolidation loan, you should be able to more accurately predict when the sum total of your currently outstanding personal debt will be paid off.