What is the Average Debt Consolidation Loan Interest Rate

One of the most important aspects of the debt consolidation strategy is ensuring you get the lowest possible interest rate on the loan. After all, this is key to coming out ahead in the deal.

The other factor about which you need to be concerned is the length of the loan. You can get the best interest rate in the world, but if the term of the loan is overly long, the number of payments you’ll make will offset those savings.

Still, it’s useful to ask: what is the average debt consolidation loan interest rate? And the honest answer to that question is that it varies depending upon several different factors.

These include:

The Type of Loan: The most common loan instruments for consolidating credit card debt are balance transfer credit cards, personal loans and home equity-backed financing. Each of these has a different interest rate scale so the average rate will vary according to the type of loan at which you’re looking.

Some loans have fixed interest rates while others have variable rates. Variable rate loans usually start off lower, but you run the risk of them going up on you as interest rates in general rise. Meanwhile, a fixed rate eliminates this risk, but charges you more for the stability.

Home equity instruments are secured by an interest in your house, so these usually have the best interest rates of all. However, you’ll forfeit your domicile if things go sideways and you’re unable to make the payments on the loan.

Balance transfer credit cards typically come on strong with impossibly low introductory offers (sometimes even 0% percent), then bump it to rates way north of 20% after the introductory period ends.

Your Credit Score: Another factor that comes into play when you’re discussing average debt consolidation loan interest rates is credit scoring. You’ll need at least a 680 figure to have a shot at the lowest rates. The farther your score comes in below that figure, the more interest you can expect to pay.

That’s why it often only makes sense to do a debt consolidation if your credit score is strong enough to net you a favorable rate. To win with consolidation, you must be certain the interest rate on the loan you take is lower than the average rate of all the debts you roll into that new loan.

Your Income: There may be instances in which your credit score is strong, but when your obligations are measured against your income, the likelihood of you properly servicing the loan could be called into question.

In other words, if you owe most of what you’re bringing in each month, you’ll be perceived as posing a greater risk — even with a strong credit score. As a result, should a lender decide to go forward with you just the same, they would insist upon a higher interest rate to hedge their bet on you.

The Lender: Debt consolidation loans are available from several different types of institutions. Banks, credit unions and online lenders are the most common. Among the three, credit unions typically offer the lowest rates because most of them operate on a not-for-profit basis. Of course, you’ll have to be a member of the credit union to borrow from one.

Traditional banks generally come in second place in this regard. Online lenders typically make qualifying easier but charge higher rates of interest. They are also more likely to be willing to work with you if your credit score is on the softer side.

With so many variables in play, definitively stating the average debt consolidation loan interest rate is quite difficult to do. With that said, as of this writing, personal loan interest rates range from 3 percent to 36%. And, as we mentioned previously, where you’ll fall on that spectrum will vary according to the factors listed above.

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