What to look for in a consolidation lender

A consolidation lender is a bank, credit union, or online lender that gives you one new loan to pay off multiple debts at once. The real difference between lenders is not their name or size — it is whether they charge you more in interest and fees than you would pay by keeping your debts separate, and whether they will lend to you at all given your credit history.

The lenders that work best for you depend on three things: your credit score, how much you owe, and whether you own a home. A person with a 750 credit score will find better rates at a bank than someone with a 580 score. Someone with $8,000 in debt may have options a person with $50,000 does not. And a homeowner can use a home equity loan, which is not available to renters. There is no single "best" lender — only the best lender for your situation.

Before you contact any lender, know your credit score and the total amount you owe across all accounts. You can get your score free from AnnualCreditReport.com or from your bank's website. Write down the balance, interest rate, and monthly payment for each debt. This takes 15 minutes and saves you from wasting time with lenders who will not work with you.

Key Takeaways

  • Your credit score determines which lenders will work with you and what interest rate they will offer — a 650 score and a 750 score will see different options from the same lender.
  • Banks typically offer the lowest rates but require a higher credit score and a longer process process, while online lenders approve faster and work with lower scores but charge more.
  • Credit unions often have lower rates than banks for members, especially if you have been with them for years, and they are more willing to work with people rebuilding credit.
  • The monthly payment matters less than the total interest you pay over the life of the loan — a lower rate for a longer term can still cost you less than a higher rate for a shorter term.
  • You should get quotes from at least three lenders before choosing one, and a quote does not commit you to anything.

Banks versus credit unions versus online lenders

Banks are the cheapest option if you have a credit score above 700 and a stable income they can verify. They move slowly — expect 5 to 10 business days from process to funding — but their rates are the lowest in the market. A bank will also require you to have an account with them or be willing to open one. If you have been turned down by a bank before, that rejection stays on your record for about 30 days, so do not explore to multiple banks in a single week.

Credit unions are member-owned, so they can afford to charge less than banks and are often more flexible with credit scores. You must be a member to borrow, which usually means living or working in a certain area, or having a family member who is already a member. If you have been with a credit union for years, they may offer you a better rate than a new member would get. Call your credit union and ask whether they do consolidation loans and what credit score they require — many will tell you over the phone.

Online lenders approve people with credit scores as low as 580 and fund loans in 1 to 3 business days. The tradeoff is that their interest rates are higher than banks or credit unions. They are useful when you need money fast or when your credit score is too low for a bank. Many online lenders are legitimate, but some charge hidden fees or use aggressive collection tactics, so read the full loan agreement before you sign. The Consumer Financial Protection Bureau maintains a list of complaints against lenders at ConsumerFinance.gov.

How to compare interest rates and fees

Every lender will quote you an APR — the annual percentage rate — which includes both the interest rate and most fees. This is the number to compare across lenders. A 9% APR from one lender is directly comparable to a 9% APR from another. Do not compare the interest rate alone, because two lenders with the same interest rate may charge different fees.

Ask each lender about origination fees, which are charged upfront and usually range from 1% to 8% of the loan amount. A $10,000 loan with a 5% origination fee costs you $500 before you even receive the money. Some lenders roll this fee into the loan, meaning you pay interest on it. Others deduct it from what you receive — so a $10,000 loan becomes $9,500 in your account. Ask which method they use.

Also ask about prepayment penalties. Some lenders charge you a fee if you pay off the loan early. This is rare among reputable lenders, but it exists. If a lender charges a prepayment penalty, that is usually a sign to look elsewhere, because it means they profit more from you paying interest than from you getting out of debt.

When a home equity loan makes sense

If you own a home and have built up equity — meaning you owe less than the home is worth — a home equity loan or home equity line of credit (HELOC) is often cheaper than a personal consolidation loan. Home equity loans are secured by your house, which means the lender can foreclose if you do not pay. Because of this security, they charge lower interest rates, sometimes 2 to 4 percentage points lower than an unsecured personal loan.

The catch is that you are putting your house at risk. If you miss payments on a personal consolidation loan, the lender can sue you and garnish your wages. If you miss payments on a home equity loan, they can take your house. Only use a home equity loan if you are confident you can make the payments, and if the interest savings are large enough to justify the risk.

A home equity line of credit works like a credit card — you borrow what you need, when you need it, and pay interest only on what you use. A home equity loan is a lump sum, like a personal loan. For consolidation, a lump-sum home equity loan is usually simpler, because you get one payment to one lender instead of managing a line of credit.

Red flags that signal a predatory lender

Some lenders target people with low credit scores and charge rates so high that consolidation makes your situation worse, not better. Watch for these warning signs: a lender that guarantees approval before checking your credit, a lender that pressures you to decide quickly, a lender that asks for payment upfront before funding the loan, or a lender that advertises "no credit check" loans at rates above 36% APR.

Legitimate lenders will always check your credit, will give you time to read the agreement, will not ask for money before the loan is funded, and will clearly state the APR and all fees in writing before you sign. If a lender does any of the opposite, do not use them. The Better Business Bureau and your state's Attorney General office both maintain complaint databases if you want to check a lender's history.

One more: if a lender contacts you unsolicited by phone or email offering a consolidation loan, hang up or delete the message. Legitimate lenders wait for you to contact them, not the other way around.

Getting quotes without damaging your credit

When you ask a lender for a quote, they will do a hard inquiry on your credit report. A hard inquiry lowers your credit score by a few points and stays on your report for about a year. Multiple hard inquiries in a short time (within 14 to 45 days, depending on the scoring model) count as a single inquiry for credit-scoring purposes, so you can get quotes from several lenders without major damage.

The key is to do all your shopping within a 2-week window. Do not get a quote from one lender, wait a month, then get a quote from another — that spreads out the inquiries and counts against you more. Gather your documents, contact three to five lenders, get quotes from all of them within 10 days, then decide. This approach shows lenders that you are seriously shopping, not desperately explore everywhere.

Before you contact any lender, you can check your own credit score and report for free at AnnualCreditReport.com without any hard inquiry. This is the only place authorized by federal law to give you a free report. Do not use other "free credit report" websites — they usually require a credit card and sign you up for paid monitoring.

What happens after you choose a lender

Once you have chosen a lender and signed the agreement, they will fund the loan within 1 to 10 business days depending on the lender type. Some lenders deposit the money directly into your bank account. Others send a check. Ask which method they use and when you can expect the money.

When the money arrives, it is your responsibility to pay off the old debts. Some lenders will pay the creditors directly if you give them the account numbers and contact information. Others will send you the money and expect you to pay the creditors yourself. Ask before you sign which method they use. If they send you the money, do not spend it on anything else — pay off the debts when ready, because you are still accruing interest on those old accounts until they are paid in full.

After the old debts are paid, close those accounts if possible. Closing them helps your credit score in the long run, because it lowers your total available credit and makes your debt-to-credit ratio look better. Do not close them all at once if you have many — space them out over a few months to avoid another dip in your score.

Frequently Asked Questions

Will consolidation hurt my credit score?

Yes, initially. The hard inquiry and the new account will lower your score by 10 to 50 points. But as you make on-time payments on the consolidation loan, your score will recover and usually end up higher than before, because you will have lower credit utilization and a better payment history. Most people see their score improve within 6 months.

Can I consolidate if I have bad credit?

Yes, but your options are limited and your rate will be higher. Online lenders work with scores as low as 580. Credit unions sometimes work with lower scores if you are a member. Banks typically require 650 or higher. If your score is below 580, you may need to wait a few months, pay down some debt to lower your utilization, or find a co-signer before you can get a consolidation loan.

What if I cannot afford the monthly payment?

Before you sign, ask the lender whether you can extend the loan term to lower the payment. A longer term means you pay more interest overall, but it makes the monthly payment manageable. If you cannot afford any payment after you have signed, contact the lender when ready — many have hardship programs that can pause or reduce payments temporarily.

Should I consolidate student loans?

Student loans have different rules than credit cards and personal loans. Federal student loans have income-driven repayment plans and forgiveness programs that a consolidation loan would eliminate. Private student loans can sometimes be consolidated, but you lose the protections that come with federal loans. Talk to your loan servicer about income-driven repayment before you consolidate.

How do I know if consolidation will actually save me money?

Use a loan calculator to compare the total interest you will pay on your current debts versus the total interest on the consolidation loan. Most lenders have calculators on their websites. Plug in the loan amount, the APR they quoted, and the term they offered. If the total interest on the consolidation loan is lower than what you are paying now, consolidation makes sense. If it is higher, do not do it.