You’ve been mulling the prospect over, and now you’re serious about to look into going the debt consolidation route. You’re hoping to get a better interest rate than what you’re paying on current debts, but you’re not sure what to expect.
Let’s take a look at the average interest rate of a debt consolidation loan.
How Debt Consolidation Works
This strategy entails combining several monthly debts into a single new loan that you repay over a fixed time period. The aim is to leave you with a single monthly affordable payment and to lower the interest rate you’re paying on your existing debt. This allows you to get out of debt faster.
Debt consolidation also reduces the stress of managing multiple payments with different due dates, since you’re making just one payment monthly of the same amount each time.
Also, by using consolidation to pay off multiple debts, you will improve your credit utilization ratio by using less of your available credit. This ratio measures the amount of your debt against your overall credit limit.
So, what is the average rate of a big debt consolidation loan?
Debt Consolidation Loan Interest Rates
The average annual percentage rate (APR) on a debt consolidation loan is about 18.56%. What does that mean in the grand scheme of things? Well, the average range of interest rates charged on such loans is usually between 8.31% and 28.81%, depending on your credit score and the lender you’re dealing with.
Average Consolidation Interest Rate By Credit Score
ValuePenguin by Lending Tree evaluated lenders and compiled the range of average interest rates by score. If you have excellent credit (720-850), the average interest rate is between 4.52% and 20.57%. Good credit (680-719) will get you an average range of between 6.67% and
If you have excellent credit (720-850), expect an average interest rate that ranges from 4.52% to 20.57%. Good credit (680-719) will get you a range of between 6.67% and 28.33%. If you have average or fair credit (640-679), expect 7.05% to 30.32%. Poor credit (300-639) comes with an average interest rate range of between 15.06% to 36%.
Average Debt Consolidation Interest Rate By Loan Term
It was also found that longer-term debt consolidation loans incur loftier interest rates on average. Your interest rate will differ according to your credit history, the lender you do business with, and the amount you’re seeking.
For loan terms of 2-3 years, expect an interest rate range of between 5.08% and 14.17%. A five-year loan term comes with an average rate of between 6.47% and 13.78%. A seven-year loan has a rate that ranges from 7.37% to 14.25%.
How Are Debt Consolidation Rates Determined?
On average, debt consolidation loans have higher interest rates than other types of debt. Why is this so? For one, debt consolidation loans are unsecured – there’s no collateral such as a house or vehicle involved. This makes these loans riskier for the lender.
Also, consolidation loan borrowers typically have large balances on debt like credit cards and lines of credit, which drags down credit scores. In addition, debt consolidation loans are usually used to lower the amount of interest you’re paying on other debts. Refinancing through a debt consolidation loan reshuffles your debts but doesn’t erase them. This reality is reflected in higher interest rates.
Now you know what the average interest rate is of a debt consolidation loan, and some of the factors that go into deciding consolidation rates. You also now know what the average rates are by loan term and credit score. Armed with this information, you’re ready to run the numbers and decide the best next move for you.