What is an effective debt consolidation loan meant to accomplish? This process has the potential to do two things: Turn multiple revolving lines of credit into one fixed-instalment payment per month and reduce how much the borrower pays to the lender in the form of interest charges.
What’s a Good Interest Rate on a Credit Card Debt Consolidation Loan
These are both compelling reasons to consider consolidating, of course. But it’s important to understand the conditions needed to reap these benefits. It’s not a guaranteed strategy available to everyone, nor does it always end up saving you money — whether or not it does depends heavily on your current financial situation as reflected on the application you submit.
Here’s more on evaluating credit card debt consolidation loans to determine whether this strategy would help or hinder you on your journey toward getting rid of costly debt.
What’s a Good Interest Rate on a Consolidation Loan?
A “good” interest rate on a loan is technically one that’ll save you money because it’s lower than what you’re currently paying on your existing debts.
For reference, the average credit card annual percentage rate (APR) is around 15 per cent — although, as Business Insider writes, it’s very common for cardholders to see APR around or higher than 20 per cent. With high average interest rates like these, it’s very common for cardholders to see their balances climb quickly, even if they’re making the minimum payments due each month.
The average APR on a personal credit card consolidation loan can vary a lot depending on how risky the lender deems the borrower to be. Higher levels of risk bring higher rates. You generally may find these loans with APR as low as 5 per cent or as high as 36 per cent.
The broadest way to evaluate an APR is by seeing where it falls on that spectrum, then comparing it head-to-head with the debts you want to replace.
Credit Card Consolidation Loans by Credit Score
What determines whether you’ll get a single-digit loan offer or a double-digit? Mostly credit rating, as it turns out.
According to data from ValuePenguin, here’s the approximate average consolidation loan APR borrowers can expect broken down by credit score & claiming dependents on taxes:
- Excellent (720 to 850): 4.5 – 20.6 percent
- Good (680 to 719): 6.7 – 28.3 percent
- Fair/Average (640 to 679): 7.1 – 30.3 percent
- Poor (639 and below): 15.1 percent – 36 percent
People with strong credit ratings are in the best position to get approved for a consolidation loan and save the most money doing so. However, it’s worth exploring your options even if your credit score is poor or average because some lenders — especially those based online — do offer more flexible options to a wider array of borrowers.
An Important Note About Consolidation Loan APR
Yes, the APR on loans largely determines whether you’ll save money by consolidation as well as the amount. However, it’s not the only factor that matters. Say you get a loan offer with 15 per cent APR, while the credit cards you want to replace have an average APR of 17 per cent. While this looks like a no-brainer on paper, you must look at the term on the new loan to truly compare total costs. A lower APR on a longer loan can actually require you to pay more, all things considered.
A good APR is one low enough to save you money once you factor in potential fees owed to the lender and the length of the loan, i.e. how long you’ll be paying those interest charges. If you’d save time and money by consolidating, it’s worth pursuing. If you would end up spending more by taking out a loan, then trying to find a strategy to pay down your balances as they are might be the better tactic.