Guide to Choosing the Best Debt Consolidation Companies

In a world of last resorts and desperate measures, debt consolidation is a veritable godsend. It’s an effective, low-cost, and hassle-free solution that can clear troublesome debts in one fell swoop and leave you with something more suitable and manageable.

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But as helpful as debt consolidation is, it’s not always an easy and straight-forward solution. Some debt consolidation companies will give you more problems than solutions, more questions than answers, and others will refuse you outright.

In this guide, we’ll take a look at the best options available to you as you seek to consolidate your debt.

How to Get a Debt Consolidation Loan

Debt consolidation can be somewhat of an enigma, a Catch-22. It’s at its most helpful when you have a lot of unsecured debt and a history of late payments, but this also means you have a poor credit score, in which case you might be refused a loan. 

After all, debt consolidation is a personal loan and a personal loan requires a good credit score. 

Bad Credit Options

Your options are somewhat limited if you have bad credit, but you’re not without opportunity:

New Credit Card

This is rarely a good option as credit cards come with high-interest rates and likely won’t benefit you unless you can find a balance transfer card with a long introductory period. 

These cards allow you to move debt from one credit card to another and for a fixed period (typically 12 to 18 months) you won’t pay any interest. You can use this period to clear the debt or at least make a significant impact so that you’ll pay less interest when the introductory period ends.

Credit Unions

A credit union may provide you with more possibilities than a bank, offering better rates and targeting these towards borrowers with lower credit scores. They can also help you to establish a debt management plan and provide you with a credit counselor.

Friends and Family

If you can’t get a consolidation loan from a bank, credit union or credit card provider, you can try asking friends or family. This is a huge ask, but if you have a terrible credit score and a lot of debt, it’s one of the only ways you can get a personal loan. You can ask them to lend money directly or take a loan on your behalf. 

In either case, make it worth their while with a monthly payment that covers more than the principle of the loan. Even if you’re repaying 10% or 20% on the total cost of the loan, it’s likely to be much cheaper than a traditional consolidation loan, which is designed to prolong the loan’s term, keeping monthly payments low but overall interest payments high.

Improve Credit Score

It’s an option you probably don’t want to see and have no doubt already considered, but the simple fact is that every time your credit score improves your chances of getting a consolidation loan improve with them. The difference between a 5% loan and a 10% loan is massive over several years as compound interest kicks in and the interest costs escalate.

It can take years for your score to improve enough to make a difference, but only if you have a lot of derogatory marks. If your score is weak because of a limited history, the odd missed payment, and very few active accounts, you can fix it in a few months. Take a look at our guide on how to improve your credit score fast to learn more.

Good Credit Options

A good credit score improves your chances significantly. There is no guarantee, but you’ll certainly have more options than someone with bad credit.

Debt Consolidation

Banks and credit unions have created loans specifically for debt consolidation. They will take your circumstances and debt into account, look at manageable monthly payments, and then provide you with the money you need to clear your debt.

This money can be used to clear credit card debt and loan debt and will come with a favorable interest rate. There may also be an origination fee, which is charged as a percentage of the loan.

Personal Loan

A personal loan is more of a DIY option. Shop around for a loan that offers a favorable interest rate and provides enough money to cover your debts, apply, and then use the funds to clear those debts. There may be an origination fee, which is charged to cover processing fees.

How to Start with Debt Consolidation

In simple terms, debt consolidation is refinancing. You’re swapping one loan for another, but in doing so you’re essentially refinancing the terms.

 If you only have one or two debts to clear, your first step should be to seek refinancing. Contact your lender and look at extending the agreement.

They may also recommend a debt management program. Both options are often more favorable than consolidation and at the very least they should be considered. Once you’ve exhausted those possibilities, you can look into acquiring a consolidation loan. 

What to Look for in a Debt Consolidation Company

Debt consolidation is a world away from debt settlement, which can be a bit of a minefield when it comes to scams. However, debt consolidation scams do exist as well, and you need to look out for these, remember to look for:

Interest Rates

If something looks too good to be true, it probably is. Make sure the company is regulated, the site is secure, and the offer is genuine. Don’t be tempted by introductory rates and false promises, only to be blindsided by small print.

Just because it’s a debt consolidation loan doesn’t mean you’re getting a beneficial rate. It’s not uncommon for consolidation loan providers to offer you interest rates much higher than the ones you already have, which means you’ll pay much more interest over the lifetime of the loan.

Changing Rates

Not all rates are fixed, so make sure your rate is. It can be helpful to use a loan rate calculator to make sure you’re getting a good deal and won’t pay more than you already are. Focus on the long-term as well as the short-term, lower monthly payments are great, but not if they mean you will pay twice as much interest over the course of the loan. 

Check the BBB

The Better Business Bureau is a great source of information when dealing with companies in the financial sector. A company’s absence from this list isn’t necessarily a sign that it’s a scam but it should warrant further research. Look at complaints and mediations as well as reviews and company info.

Look for Affiliations

Does the company work with the National Foundation of Credit Counseling or the Financial Counseling Association, do they have any worthwhile affiliations? These partnerships can be a sign that you’re dealing with a legitimate consolidation company.

How Do Debt Consolidation Companies Work?

Imagine that you have $30,000 in debt spread across three credit cards:

  • Credit Card 1 = $10,000
  • Credit Card 2 = $10,000
  • Credit Card 3 = $10,000

You’re paying 20% APR and making monthly repayments of $300 each or $900 total. Those loans will be repaid in approximately 4 years and in that time, you’ll repay just over $4,700 in interest per card, amounting to a total repayment of $44,100.

If you take out a 5-year personal loan at 10% interest, you’ll pay $637 a month and repay just $38,245, saving you a couple hundred bucks a month, nearly $6,000 in total, and making the debts more manageable, all at a cost of an additional year.

However, there are some issues to consider here. Firstly, if you really want to reduce those monthly payments, you’ll need to increase the loan’s term. If we reduce it to under $300, then you’ll pay back close to $70,000 and it’ll take 20 years to clear.

This is essentially how many consolidation companies work. They’ll promise to clear your loan debt and leave you with a low monthly payment, but in doing so they’ll prolong the life of your loan and leave you repaying massive amounts of interest.

Of course, if you get a loan with just 4% interest, you can clear the above debt in 4 years, pay just a couple grand more, and repay less than $700 a month. But this option isn’t available for the majority of borrowers.

Pros and Cons of a Debt Consolidation Loan

Debt consolidation is not always the best option. It certainly can be if you have the freedom of choice and a great credit score to back it up, but if you’re struggling in that department then debt consolidation can be a nightmare that drags you into lifelong debt.

Pros

  • Clear Debts: Turn multiple debts into one manageable one.
  • Lower Rates: Pay less money every month, thus improving your debt-to-income ratio and decreasing outgoings.
  • Fewer Penalties and Missed Payments: With lower monthly payment demands and fewer debts, your risk of missing payments and accumulating penalties reduces.
  • Multiple Options: There are several options available, even for borrowers with a low credit score.

Cons

  • Extend Debt: It can extend the length of your debt.
  • Pay More: You may pay more money over the lifetime of the debt.
  • Prolonged Misery: Unlike debt settlement, it won’t drag you out of debt any time soon and if your debts are causing you great stress, it may prolong that.
  • Credit Score: A consolidation loan will appear as a new account on your credit score, although at the same time the other accounts will be cleared. You may, therefore, take an initial hit, but this will even-out before long.

The Best Debt Consolidation Loan Companies

There are dozens of reputable debt consolidation companies out there, many of which provide loans that can be used to purchase cars, make home improvements or launch a business, as well as consolidate debt. 

There are a few key points to consider when looking for a debt consolidation company including the minimum credit score they require, the origination fee, the loan amount and term, and whether or not they require anything specific from borrowers.

With those things considered, here is a selection of the best debt consolidation companies out there right now.

BestEgg

BestEgg is has funded more than $9 billion worth of loans with a 95% customer satisfaction rate and an A+ BBB rating.

The process is quick and easy and you can secure as much as $35,000 for consolidation and major purchases. You need a minimum credit score of 640 to apply and they have interest rates ranging from a low of 5.99% to a high of 29.99%.

There are origination fees, however, and they also require an extensive credit history, which rules them out if you’re young and are only just starting to build credit.

LightStream

LightStream was launched back in 2013 as a division of SunTrust Bank. It requires a minimum FICO Score of 660, but there is no origination fee, no minimum debt-to-income ratio, and there is also a co-signer option.

You can borrow anywhere from $5,000 to $100,000 with LightStream and use this to repay loans from approved lenders, with terms fixed for between 2 and 7 years.

LightStream’s rates are between 5.49% and 17.29% and its higher maximum loans make it a great option for consumers with substantial amounts of debt.

Upstart

You can borrow as little as $1,000 with Upstart and repay this over 3 to 5 years. You only need a FICO Score of 620 or more to apply. There is an origination fee, however, and this can be quite expensive, but it all depends on the individual and the size of the loan, ranging from 0% right up to 8%.

Upstart claims to have lent over a quarter of a million individuals more than $3.2 billion since it was founded.

Discover

One of America’s most trusted credit card providers also offers consolidation loans to all consumers with a credit score of 660 or more. You can borrow between $2,500 and $35,000 with Discover and monthly payments can be spread over a term of between 3 and 7 years. 

This is a personal loan, but one that can be used for debt consolidation, and there is no origination fee or minimum debt-to-income ratio requirement.

Other Reputable Debt Consolidation Loan Companies

There are many other reputable companies in this sector, including a whole host of banks, credit unions, and lenders:

  • Marcus, By Goldman Sachs: A 660 credit score is required; respectable interest rates are offered.
  • Prosper: The lowest rates are a little higher than some other companies, but there is also a lower cap on the maximum, with loans between $1,000 and $45,000 on offer.
  • Payoff: Get up to $35,000 with interest rates that drop as low as 5.99%.
  • Upgrade: Loans up to $50,000 with a minimum credit score of 600.
  • Avant: A good option for bad credit and loans up to $35,000.

Debt Consolidation vs Debt Settlement

Debt settlement aims to clear your debts and works best when you have missed payments and old debts. A debt settlement company, such as National Debt Relief, will ask you to pay money into a secure account and then use this money to negotiate with lenders. National Debt Relief’s goal is to get the lenders to settle for a reduced amount and clear the debt in exchange, thus removing them from your credit report.

However, debt settlement has a notable impact on your credit score. Not only do companies like National Debt Relief request that you stop making payments so they can use the money to negotiate, thus leading to missed payments, but the process can take several years and you may be sued in that time.

It’s also not an option if you don’t have much more to spare every month. This means your only option is to use money that would otherwise go toward paying off debts, which in turn means those debts will default and you’ll miss several months of payments, potentially entering collections.

Debt consolidation avoids all these issues and is a simpler process that does much less damage to your credit score. A new account will appear on your credit report and reduce your score, however, and debt consolidation is not without its issues.

FAQs on Debt Consolidation Loans

Still have some questions about these loans, how they operate, and how they can help you? Take a look at these frequently asked questions which cover some of the points we have yet to discuss:

What are the Different Types of Debt Consolidation?

Debt consolidation takes many forms and applies to any personal loan or balance transfer that moves one or more high-interest debts into another, low-interest account.

A large, low-interest personal loan is the best option and one we have discussed extensively already. Other options include:

  • Home Equity Loan
  • Bank Consolidation
  • Credit Union Consolidation
  • Balance Transfer Card
  • New Credit Card
  • Refinancing
  • Home Equity Loan

How Does it Affect Your Credit Score?

Debt consolidation can both positively and negatively affect your credit score. On the one hand, you will be hit with hard inquiries and a new account penalty. Your average account age will also drop. On the other hand, your credit utilization score should reduce and your payment history should improve now you have more manageable debt.

What are the Financial Consequences of Debt Consolidation?

In the short-term, debt consolidation will improve your debt-to-income ratio as you’re reducing your monthly payments while maintaining the same earnings. This gives you more buying power and provides a little breathing space.

It also relieves pressure that would otherwise be applied from multiple high-interest loans and credit cards, pressure that could result in delinquencies.

What Should You Consider Before Applying?

Make sure you have understood the pros and cons and that you know what you’re getting yourself in for. As discussed already, debt consolidation isn’t for everyone and it’s not without its problems. You may be signing up for decades of debt.

Don’t focus too much on the lower monthly payments and try to look at the bigger picture.

Can I Use My Credit Card After Debt Consolidation?

Try to keep cleared credit cards active, as this will improve your credit utilization ratio by keeping your debt low and available credit high. Don’t rush into using them again, however, unless you have properly budgeted and know you’ll be able to clear the balance every month.

The last thing you want to do is accumulate more credit card debt after going to great lengths to pay it off.

Why Am I Being Refused?

Your credit score may be too low or you may have a limited credit history. Lenders want customers who have a proven track record, which means your score needs to be respectable and you need to have a record of monthly payments, cleared accounts, and debt variety.

What Other Options Do I Have?

Debt consolidation is far from the only option and while it is one of the better ones for many consumers, it’s not suitable for everyone. Other options include:

  • A Debt Management Plan: A debt management plan is preferable in many ways as you don’t need to apply for new loans, pay origination fees, and worry about your credit score taking a hit. It’s all about helping you manage your debt.
  • Non-Profit Credit Counseling: As with debt management, credit counseling is geared towards helping you find your feet, manage your debts, learn to budget, and maneuver through difficult times. The ultimate goal is to avoid delinquencies and last resorts like bankruptcy.
  • Repayment Plan: If you’re struggling to meet your current monthly payments, try to negotiate a repayment plan with your creditors. They want to make sure you pay your debts and don’t default, and if that means reducing monthly payments and prolonging the term, they’ll be happy to do it.
  • Debt Settlement: A good option if you have some money put aside, can afford to wait, and have multiple debts that you want cleared completely.
  • Bankruptcy: It should always be a last resort as it can leave a mark on your credit report that stays for 10 years, but bankruptcy is an option nonetheless. We only recommend looking into this if you can’t find a debt consolidation loan; debt settlement and debt management is not an option, and you have more debts than you can afford to pay. Don’t take bankruptcy lightly, even if it seems to be in-vogue with celebrities.